Credit Suisse chips away at bonus de­fer­ral fetish

The Pak Banker - - COMPANIES/BOSS -

Credit Suisse's higher fixed costs are one of sev­eral un­in­tended con­se­quences of the new rules gov­ern­ing banker pay. The Swiss bank is shrink­ing the pro­por­tion of an­nual bonuses it de­fers to 41 per­cent, from well over half in 2013. There's a clear ra­tio­nale: boss Tid­jane Thiam is try­ing to cut ex­penses, yet he can barely clamp down on pay be­cause of awards made in pre­vi­ous years that keep com­ing due.

To get an idea of Thiam's lack of flex­i­bil­ity, con­sider Credit Suisse's pay bill in 2014. Bonuses awarded for and paid in that year made up around 15 per­cent of the group's to­tal com­pen­sa­tion. The bulk of the rest con­sisted of fixed costs that in­cluded salaries, sev­er­ance pay­ments, pen­sions - and bonuses de­ferred from pre­vi­ous years. Put an­other way, even if Credit Suisse had paid no cash bonuses for its 2014 per­for­mance, its costs would have still eaten up 80 per­cent of its rev­enue.

De­fer­rals be­came com­mon­place fol­low­ing the 2008 fi­nan­cial cri­sis be­cause reg­u­la­tors rightly wanted to stop bankers waltzing off with a cash bonus if the trades that en­abled it then went bad.

But they have been ham­strung by two fac­tors. Jit­tery mar­kets have meant that the op­ti­mistic vi­sion of banks pay­ing de­ferred bonuses out of fat­ter prof­its fur­ther down the line hasn't panned out. And the Euro­pean Union's bonus cap pre­vents banks from pay­ing vari­able com­pen­sa­tion of more than two times salaries, which has pushed up the fixed el­e­ment of com­pen­sa­tion and given in­sti­tu­tions even less cost flex­i­bil­ity.

From the per­spec­tive of a new bank chief at­tempt­ing to in­cen­tivize his troops, de­fer­rals are a pain for rea­sons other than in­come state­ment man­age­ment. Em­ploy­ees tend to dis­count the value of their awards the more that they are de­layed, PwC re­search has shown. The lack of flex­i­bil­ity makes it harder to give star re­cruits a rea­son to stay. This isn't just a Credit Suisse headache: Bar­clays (BARC.L) de­ferred the en­tirety of its man­ag­ing di­rec­tors' vari­able com­pen­sa­tion in 2014.

De­spite all this, Credit Suisse's gam­bit may not sig­nal that de­fer­rals' days are num­bered. Banks' new abil­ity to can­cel un­vested awards - us­ing so-called "malus" pro­vi­sions - has given the in­dus­try a bit more con­trol over how much they might ul­ti­mately have to hand over. More im­por­tantly, the one al­ter­na­tive ap­proach that the­o­ret­i­cally could dis­place de­fer­rals may not fly.

In the UK, banks are now legally obliged to do all they can to ex­er­cise "claw­back" - re­claim­ing bonuses al­ready paid in the case of em­ployee mis­con­duct, er­ror or risk-man­age­ment fail­ings. In the­ory, al­low­ing banks to force em­ploy­ees to pay back their bonuses if their ac­tions later prove to have dam­aged their em­ployer seems rea­son­able. If it were to work smoothly, the need for de­fer­rals wouldn't be so great.

In prac­tice, lawyers think claw­backs will be at best costly and at worst un­work­able. Un­like malus, where the banks re­tain con­trol of the un­paid awards, in­di­vid­u­als fac­ing claw­back will of­ten have al­ready spent the money. It could cost banks al­most as much to pur­sue them through the courts as they stand to gain. In Euro­pean coun­tries with tough la­bor laws, they could be un­en­force­able and en­cour­age reg­u­la­tory ar­bi­trage.

The good news is that banker pay is still fall­ing. There are en­cour­ag­ing signs bosses in­creas­ingly un­der­stand that pay should be linked to per­for­mance - Thiam has asked the board to sub­stan­tially re­duce his bonus for 2015, while at Deutsche Bank (DBKGn.DE) the en­tire ex­ec­u­tive board is fore­go­ing vari­able com­pen­sa­tion. And while the EU bonus cap has al­most cer­tainly stopped pay fall­ing as fast as it oth­er­wise might, over­all com­pen­sa­tion has still dropped sig­nif­i­cantly.

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