Bank Bonuses

How Little We Have Learned

  • Why it matters

    Why it matters

    Credit Suisse’s excessive bonuses for top executives are typical of an industry where lack of transparency and extravagant business models still prevail.

  • Facts

    Facts

    • Credit Suisse chief executive Tidjane Thiam drew a salary of $10.24 million, despite losses of $2.71 billion last year.
    • Only 58 percent of the shareholders voted to accept the Swiss bank’s compensation report.
    • Deutsche Bank’s board members voluntarily sacrificed their bonuses in light of billions in losses last year.
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    Audio

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Tidjane Thiam is not acting with the long-term focus of a responsible executive, the author argues. Source: AP

They got away with it, but just barely. Credit Suisse executives’ bonuses barely scraped through a shareholder vote on Friday. Only 58 percent of shareholders voted to accept the Swiss bank’s compensation report. Prior to the vote, board chairman Urs Rohner came under fire over the size of the planned bonuses. He avoided an all-out revolt by lowering them by two-fifths.

Instead, investors gave the ailing bank’s top executives a harmless slap on the wrist.

It was a missed opportunity to show the red card to chief executive Tidjane Thiam’s salary excesses, and send a clear signal to the broader European banking industry. A decade after the financial crisis, lack of transparency and extravagant business models still prevail in the industry’s boardrooms.

Executive pay in many industries still comes under fire. But criticizing financial industry bonuses isn’t just populist bank-bashing. Performance and bonuses still diverge most at the larger banks. Only banks have the audacity to pay out double-digit millions in bonuses, even as they lose billions.

This is especially true at Credit Suisse. Losses of CHF2.7 billion ($2.71 billion) last year were shamelessly accompanied by a chairman’s salary of CHF10.2 million.

The top management’s justification for this was as brazen as it was unconvincing. Bank losses, they said, could primarily be attributed to a billion-dollar fine in the United States. And this fine was, after all, inherited from before current management took over. In fact, top executives should be rewarded for cleaning up this inherited problem so quickly.

This attitude shows how larger banks have yet to achieve a change in culture at the very top. Credit Suisse is a striking example.

For years, Switzerland’s second-largest bank has focused its quarterly reports on profit figures, which are always adjusted for one-off effects. In this way, the bank presents itself as dramatically more profitable than it really is. Yes, there other companies that do this, but the audacity of justifying bonuses with these glossed-over numbers is unique.

It’s the task of supervisory boards to establish responsible bonus systems. If they do not do this, investors should vote their members out of office.

Apparently, Mr. Thiam – who was rightly seen as a talented executive during his time at the British insurance company Prudential but has repeatedly put his foot in it at Credit Suisse – will not work for less, and would leave the bank. This short-term mentality is not the attitude of a responsible executive.

Deutsche Bank’s board members, under the leadership of John Cryan, have a different attitude. In light of billions in losses last year, they voluntarily did without their entire bonuses. A noble gesture. But ultimately, even this was nothing more than an admission that the salary system at Deutsche Bank is just as badly organized as at many other banks. It seems reasonable that if a bank experiences billions in losses, bonuses should be automatically wavered. Shareholders would welcome this.

Another problem is lack of transparency. Compensation reports of Biblical proportions written in cryptic language are common practice at banks – a confusion of numbers in which billions in payments can be hidden in small print. Add to this bonuses linked to far too many incomprehensible objectives. What is sold as a sophisticated system of stringent criteria for success has in reality degenerated into a completely non-transparent instrument.

What the banking industry needs more than anything are simple, transparent and financially commensurate bonus structures. These should be share-based payments, ideally linked to a single profit target, with payment stretched over at least five years. At the same time, there should be the possibility to cancel bonuses and even demand they be paid back, if short-term success turns out to have been purchased with high long-term risk.

It’s the task of supervisory boards to establish such responsible bonus systems. If their remuneration bodies do not act to do this, investors should hold firm and vote their members out of office.

 

To contact the author: d.schaefer@handelsblatt.com 

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