With its announcement Tuesday of a revamped compensation model for executive managers and director-level employees, Credit Suisse is taking something of gamble that competing banks will move in the same direction.
Key elements of the plan are revolutionary in terms of financial-services industry standards and could prompt an exodus of top talent if Credit Suisse stands alone, observers said. But other large banks are feeling public and governmental pressure on the compensation front as well. Some have quietly made their own pay-structure adjustments recently and more are likely to follow, though it remains to be seen if any will be as bold as Credit Suisse.
The Switzerland-based bank is subjecting bonuses — which will be paid out in both cash and stock, as is typical in the industry — to lengthy vesting periods during which their value will be adjusted depending on company or business-unit performance. That is a major departure on Wall Street, where high-earning employees are long accustomed to receiving cash bonuses soon after each year concludes and getting equity that, while subject to vesting, is a definite vested amount of shares.
The cash portion of bonuses will vest over three years, adjusted upward from an initial notional amount if the bank’s return on equity increases during the period and downward should the recipient’s business unit show lower ROE. (A common measure of profitability used in bonus-payout calculations, ROE is determined by dividing net income by shareholders’ equity.)
For stock-based awards, the number of shares ultimately awarded will depend on the bank’s ROE and average share price over a four-year vesting period. Unlike the cash bonus, however, the number of shares can go up but not down.
Another element of the Credit Suisse plan is that deferred payments will be 50% in cash and the other half in unvested stock. Further, at Credit Suisse base salary will make up a larger portion of the employees’ total compensation than had been the case previously.
A Credit Suisse spokesperson said the changes apply to approximately 2,000 employees in the United States and 7,200 worldwide. But how many will opt to stay with Credit Suisse? “Logically, people will be attracted to companies that don’t have that kind of structure,” said Mark Poerio, an employment partner with the law firm Paul Hastings. “It’s a significant departure from past practice.”
Another labor attorney, Paul Starkman at Arnstein & Lehr, agreed for the most part. He noted that the revamped plan decreases the importance of individual performance and boosts that of the firm’s overall results. People are not likely to think kindly of having bonus money clawed back “because other people in the bank didn’t do their jobs properly,” he said. But he also said that for Credit Suisse employees who don’t leave right away, the pay changes “in effect may be a golden handcuff in that they have to stick around to get the full package.”
Poerio speculated, though, that more banks will indeed follow Credit Suisse’s lead in responding to recommendations drafted at last month’s G-20 economic summit in Pittsburgh. There, world leaders called on companies to defer bonus payouts for several years in order to reduce risky behavior that’s aimed at propping up short-term results without concern for long-term value creation.
Given the tide of sentiment against financial firms over their bonuses, such recommendations could evolve into regulations, Poerio suggested. “I think the smarter companies will be trying to defuse the issue and show they can be responsive to shareholder and governmental concerns, and perhaps defuse the need for legislation or governmental or global banking regulation,” he said.
It is nowhere near clear that the government would even consider such a radical step. The Obama Administration today announced plans to dramatically reduce the compensation of top executives at five financial firms and two automakers that have not yet paid back federal bailout money. And the government’s compensation czar, Kenneth Feinberg, said he hoped those pay reductions would be “voluntarily picked up in the marketplace,” by both other financial firms and corporate America in general, Blomberg News reported. But there was no suggestion that mandatory pay measures would apply to any companies other than those that are deep in the government’s debt.
Still, Ira Kay, director of executive compensation at consulting firm Watson Wyatt, said he agreed with Poerio to a certain degree. At the very least, he said, the banking community generally is feeling tremendous pressure over compensation issues. “The banks’ boards are adamant that they need to take into account the public, government, and regulatory perspective,” he said. “So they’re pushing back on compensation, even if there’s some collateral damage in terms of turnover.”
Two of Kay’s financial-services clients recently increased by 10% the deferred, stock-based proportion of bonus compensation. It was very controversial within the boardrooms, he said.
“The boards have to be sensitive to doing things that could cause regulation, but they also have to run the company so they don’t lose hundreds of millions of dollars by having skilled labor leave,” Kay said. “It’s a very complicated problem with no trivial solution.”