Keeping bankers happy with their bonuses is difficult at the best of times. And this is not the best of times.Instead of the sackloads of cash that Wall Street and the City’s finest usually look forward to, those in charge of remuneration are having to turn to a less appealing option: stock.
Paying up to 70 per cent of compensation packages in shares changes the dynamic of the annual bonus round. Employees may dislike the lack of hard cash while shareholders may be unimpressed at the prospect of dilution.
At present, UBS employees own only 6 per cent of their firm’s shares; at Credit Suisse they own 10 per cent; at Deutsche it is 3 per cent; at Merrill Lynch, employees hold about 25 per cent of the stock. At Goldman Sachs they own slightly less .
But the problem for investment banking bosses is how to sell such a difficult message to both audiences.
The human resources line is to justify it on the basis that it aligns the interests of employees with the company, which should be to the long-term benefit of shareholders too.
The reality is more complex. A banker in possession of bombed-out shares is a cheaper catch for a rival bank that can buy out options at relatively little cost. So the share ownership does not necessarily lead to staff stability.
Beyond this, the value of shares is a somewhat blunt instrument as a motivational tool. Share price fluctuations are well outside the control of individuals or teams and bankers know this.
Since the banks do not have the option of resorting to cash in the way they – and their staff – might prefer, they will need to show more imagination.
One option could be to bring back “Herbies”.
Introduced by Herb Allison at Merrill Lynch in 1990, Herbies tied bonuses to return-on-equity targets. When these were achieved, shareholders and employees shared the profit. It may be time to launch Thainies.
