Thursday, October 22, 2009

Banks Bonuses & The Surrounding Anger

Who isn't appalled by bankers' bonuses!!! The underlying resentment is that they needed tons of taxpayers' money to steady their ships, and now that things are better, they want things back to normal?!

The general public is pissed off as there was no penalty when banks were raking in big profits pushing the very instruments that caused the financial decimation, if the financial crisis was caused by something or someone else, we may understand, but the culprits were themselves ... and when things go belly up, they go pleading to the governments for help, with a wink, wink... hidden threat that "if you don't, things will be a lot worse for everybody". You cannot hold the people to ransom, heads you win, tails you also win but a bit later.

Goldman has provided forty over percent of profits for bonuses to be paid in January 2010. Granted, Goldman is a different kettle of fish as they largely avoided the CDOs fallout, in fact they even profited from it by shorting the relevant instruments. Goldman also make most of its profits from proprietary trading, so one cannot really begrudge their hefty bonuses.

By right, its the shareholders who should be voting or complaining, if they wish to. If shareholders are not complaining, seriously, the rest of the world should not... really!!??
You can do what you like if you are a private company. When you are listed, you have added responsibilities. Naturally, one could say if a company behaves badly, shareholders should sell their stocks. If Warren Buffett were to pay himself 50% of all profits, I am sure Berkshire Hathaway shareholders would try and burn down his house, and sell down the shares.

So, where is the reality and principles involved here.
I would tend to side with market forces on this. As a listed company, I do think shareholders have a role to play - if you think Goldman pays too much bonuses, then sell the shares, why protest.

The other side of it is, if you actually relied on taxpayers money to keep afloat when things are bad, then you are not really just a normal listed firm, you are a firm that have been "bailed-out" by the people... when you most needed it. If you can operate without any help from the government or the people, then by all means do what you like. But when you are intrinsically somehow dependent on the people to save your butt every time you fuck up royally, then you have to NOT pretend that you deserve all the profits you made because its the people that sustained and resurrected the fucking markets for you.

Shareholders may not be so legalistic as to SELL on principles alone, unfortunately we are not in an egalitarian society, even though that would a lot nicer. Hence on principle, on fairness and the greater good ... banks should be more circumspect and practice self-restraint, because seriously... the next time you buggers go to the well, we are going to say fuck you too, and let a few more of you go belly up like Lehman.

The trouble with all this is that investment banks have become too big, and their flow on effects and consequences are very nasty if any of them fail. The G20 should try to cut them down to size. Bring back the Glass Steagall, separate the investment banks from the consumer banking side. Then limit the exposure each bank have to each investment bank in terms of funding. Then kill off the OTC markets on derivatives, all derivatives MUST be transparent, listed and properly regulated. There must be a regulator with teeth to watch the capital requirements on these transactions. Regulation on hedge funds must be increased manifold - sigh... I hate to be a financial policy strategist, its such a thankless task.

Anyway, at least some firms are trying to behave better, read the Finance Asia article on bank bonuses:


FinanceAsia: Credit Suisse on Tuesday announced revised compensation practices effective January 1, 2010, that will also be applicable to 2009 bonuses.

Credit Suisse is changing the mix of bonus and salary payable to managing directors and directors, such that fixed salaries will be a larger component of the overall payout for employees at these senior levels. Vice-presidents and below will not be affected. Bonuses up to $100,000 will continue to be paid in cash. Higher amounts will be subject to deferral.

For deferred compensation Credit Suisse is introducing two new instruments: scaled incentive share units (sisu) and adjustable performance plan awards (appa). Deferred compensation will be paid half in sisu and half in appa. Up to 50% of bonuses for MDs and directors will be payable in these two forms.

Sisu are similar to the incentive share units that Credit Suisse has been using for the past three years. Sisu are linked to a base share amount on a four-year pro-rata basis, which vests annually. The difference is that the holder is also entitled to additional shares, which vest after four years based on Credit Suisse's average share price over a four-year period as well as the return on equity (ROE) the bank has achieved. If Credit Suisse's average ROE over the four-year period is higher than a pre-set target, the number of additional shares will be adjusted upwards, and if it is below the target, the number of additional shares will decrease.

The appa has a notional cash value and vests pro-rata over three years. This is also linked to ROE -- it has a notional value that adjusts upward annually using Credit Suisse's ROE for that year as a multiplier. If the employee works in an area of the bank that has made losses, the appa will be adjusted downwards. For divisions that earn revenues, payouts will be linked to financial contribution. For shared services and support functions, payouts will be based on the financial performance of Credit Suisse as a whole.

This Swiss bank is also introducing minimum share ownership requirements for members of management committees and for the executive board, presumably to ensure that the net worth of senior decision-makers is linked to the performance of the firm.

Credit Suisse said the new guidelines are consistent with discussions at the Group of 20 summit which was held in Pittsburgh in September.

"At a time of strong focus on executive compensation, we are announcing a compensation structure that enables us to strike the right balance between paying our employees competitively, doing what is right for our shareholders and responding appropriately to regulatory initiatives and political as well as public concerns, " said Brady Dougan, chief executive officer of Credit Suisse Group.

Compensation for bankers is becoming a heated debate, especially in the US, where much of the population is reeling under recessionary conditions.

Earlier this year Morgan Stanley outlined a compensation plan that pays bonuses to executives over three years based on defined performance parameters for the individual and the firm.

On its third quarter earnings call on October 15, Goldman Sachs told analysts, according to a transcript posted on seekingalpha, that it was providing $5.4 billion, or 43% of revenues, for compensation and benefits for its 31,700 employees. Goldman highlighted that this was just a provision and bonus decisions would be made at year-end, but said the "accrual reflects our record year-to-date revenues in 2009".

"We're also cognisant of what's going on in the world and the pressures we're under and so we're going to try and balance those things as we work through the end of the year and we'll make our decisions as we get to year end based on the overall performance of the firm and our people," said David Viniar, Goldman's chief financial officer on the call. The third-quarter accrual was below the $6.6 billion, representing 49% of revenues, that Goldman provided for compensation in the second quarter.

Last month, at a Handelsblatt Banking Conference, Goldman Sachs CEO Lloyd Blankfein acknowledged that much of the controversy and anger regarding banker compensation was "understandable and appropriate". Blankfein went on to outline the principles governing compensation at Goldman Sachs, which include paying senior people mostly in deferred equity and evaluating performance over time to avoid excessive risk taking.

p/s photos: Melissa Surihani


see said...

Looks like Obama & co has no guts to push through reform. He is NATO ie No Action Talk Only just like other politicians

Eric How, said...

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Huge huge fan!!!!!
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What's the score?


If shareholders are not happy with the behaviour of its management, the way to punish/protest is not to sell off/down shares. 1) However many times ownership changes hands, the Managements is not affected 2) It hurts the shareholders more than it does the managers if shares are sold down

The way to punish/protest is to put the fear of job loss into the management team.

rask3 said...

Fair comment. But u missed the fact that to attract and retain the best talent, the compensation package has to be generous, even over generous. And you know there is a talent market, that sets the price, well, kinda. It not entirely up to senior management to decide on the compensation package.

I wouldn't want to lose my top people to someone who is willing to up the ante. Of course, within limits. I believe the solution to this problem lies in setting up banks that can be allowed to fail. Not easy but doable.

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