René Stulz and other academics members of the avowedly non-partisan Squam Lake Group have come out with an update of their well-received 2010 paper on fixing finance, post the crisis. Click below to read their fresh thoughts on banker pay and the knotty problem of properly aligning incentives.
As the FT reports on Monday, banks in Europe are rushing to redraft executive pay deals in order to comply with recently passed legislation capping bonuses at the amount of fixed pay, or twice that amount where approved by investors.
We submit for discussion an illustration plus narrative on the subject the bonus cap, penned by Kevin Roose. (H/T Barry Ritholtz) Read more
Some time ago Brussels decided that capping bankers’ bonuses is going to help prevent another financial crisis. A very fashionable move. In fact, the passage of the Basel reforms was contingent on a cap being introduced, so after months of negotiations, a deal was finally stuck this week.
From the FT (our emphasis):
Bankers’ bonuses are to be capped at twice their salary and banks will be subject to a strict transparency regime, under a provisional EU deal that includes minimal concessions to cushion the most severe pay crackdown since the 2008 financial crisis.
UBS reported a fourth quarter loss of CHF1.2bn — actually CHF1.9bn, when considering Libor fines and other regulatory and legal costs, plus restructuring costs. The loss came in a little lower than the median estimate of analysts surveyed by Bloomberg.
The full monstrous PDF is here, but meanwhile, we note the FT’s Daniel Schäfer scooped an interesting change to the bank’s bonus policy for its 6,500 highest earners: Read more
Investment banks in the UK are set to push ahead with bonus cuts next year as a mixture of falling revenues and political and shareholder pressure prompt a fresh rethink on remuneration. The FT reports City bonuses are expected to drop by another £1bn, or more than a quarter next year, the Centre for Economics and Business Research estimates. The forecast adds to the expectation of an almost 40 per cent drop in City bonuses to £4.2bn this year. Meanwhile, the WSJ says Senator Charles Grassley, the Iowa Republican who introduced broad bankruptcy legislation that became law in 2005, asked Attorney General Eric Holder to examine the Justice Department’s efforts to enforce a law limiting executive pay in certain bankruptcy cases.
Bloomberg reports that Morgan Stanley, Citigroup, and Credit Suisse cut the average pay of their investment bankers by 30 per cent year-on-year, after reporting lower revenues. There has also been a trend for firms to pay less of bonus awards in the form of cash, as well as having longer deferral periods over which stocks or additional cash is paid out. Financial stocks were among the worst performers in the S&P 500 index over the last year. Meanwhile, the WSJ reports that bankers in Hong Kong employed by European firms are particularly vulnerable to job cuts as their firms seek to scale back regional operations. Analysts are concerned about the knock-on impact of such job losses as bankers sell their properties and move out.
Can’t beat a Sun headline to round off a national bonus neurosis:
RBS chief executive Stephen Hester agreed on Sunday night to give up a bonus worth almost £1m, bowing to an intense media and political campaign and averting what threatened to be a humiliation in the House of Commons, the FT says. Mr Hester had been urged by the RBS board to defy his critics, but he finally buckled after Ed Miliband, Labour leader, announced his party would stage a Commons vote denouncing the bonus. “It was the final straw,” admitted one ally of the bank chief. The vote threatened to be a harrowing occasion for Mr Hester, with MPs from all sides expected to line up to criticise him and to demand that he give up the £963,000 bonus, awarded in spite of RBS’s share price almost halving last year.
Around exam time at university, the conversation always seemed to fluctuate between points of revision, questions that might be asked, and what the meaning of life actually is. “Exams aren’t a test of your real ability,” you’d tell a friend who was almost certainly doomed.
For those who graduate and go to work in investment banks, the yearly cycle of reflection about the meaning of it all moves from beginning of the summer to the beginning of the year — about the time that bonuses are paid out. Read more
RBS has sought to defuse mounting political and public pressure in awarding chief executive Stephen Hester a bonus of just under £1m, less than half the amount he received for 2010, reports the FT. The controversy over the size of Mr Hester’s payout had reached fever pitch in recent weeks, as the state-owned bank announced plans to slash more than 4,000 jobs and shut down large chunks of its investment banking business following dismal results. But the political furore may only just be beginning. Jeremy Browne, a Liberal Democrat foreign office minister, last night reflected public anger on BBC’s Question Time when he said Mr Hester had a “moral duty” to waive the bonus, in a sign of coalition splits on the issue. As with all share awards, the potential value of the award will fluctuate with the bank’s share price. RBS shares need rise only slightly to push the value of the award over Mr Cameron’s supposed line in the sand of £1m, pay experts noted. Mr Hester’s total remuneration for the year could be worth £7m, the Telegraph says.
Morgan Stanley plans plans to cap cash payouts at $125,000, the WSJ says, citing people familiar with the matter. Some top executives will receive nothing now, deferring their 2011 payouts until the end of this year. The bank will defer the portion of any bonus past $125,000 until December 2012 and December 2013, according to one of the people, and chief executive Gorman and the other nine members of Morgan Stanley’s operating committee will defer their entire bonuses for the year. The changes to the structure of compensation at Morgan Stanley are in line with forthcoming rules on compensation in the US, the FT reports, which will require banks to emphasise clawback provisions and to defer bonuses. However, to the chagrin of some European bankers and regulators, the US rules are less prescriptive than in Europe.
Royal Bank of Scotland is determined to press ahead with plans to pay out promised bonuses to investment bank boss John Hourican and other top staff, says the FT. The newspaper reported on Monday that RBS investment banking boss Mr Hourican is in line for a £4m payout under the terms of a deferred grant of shares from 2009, further escalating tensions with the government. The grant comes as RBS’s investment bank – like many others – is struggling to make money, with thousands of jobs set to be axed. Citing people close to the plan, the newspaper says about 5,000 job cuts were likely to be outlined, although 2,000 of those were implemented in the fourth quarter of last year, and unnamed senior bankers say that number could rise further, possibly to as much as 10,000 over the next two years in a worst-case scenario, if RBS is unable to sell certain businesses as planned and is forced to close them down. Bloomberg says other investment banks are considering effective pay freezes for junior bankers, with Credit Suisse likely to suspend the industry-wide practice of raising pay automatically each year for analysts, associates and vice presidents in the investment-banking division, according to a person with direct knowledge of the decision. The report cites a person briefed on JPMorgan’s plans as saying that company doesn’t intend to alter its practices but may change course if other firms do so.
The government will accept “in full” Sir John Vickers’ report proposing an overhaul of Britain’s banks, said Vince Cable, business secretary, the FT reports. The coalition will give its formal response to the report by Sir John’s Independent Commission on Banking on Monday, endorsing plans to split big banks and place separate retail operations behind a high capital wall. Mr Cable said he had reached a “common view” with George Osborne, chancellor, that the changes would be put into law before the planned 2015 election. Meanwhile, Nick Clegg, deputy prime minister, will today articulate “the anger that people feel at the bonuses still flowing to bankers”, promising to use the government’s controlling stake at RBS and Lloyds Banking Group to ensure restraint.
Goldman Sachs managers have been reminding their London-based employees that temporarily higher salaries granted to them for 2010 would expire beginning in 2012, says the WSJ. The move dates back to a decision to shift bankers’ pay into salaries and away from incentive-based compensation, in the midst of a public backlash against big bonuses. Their pay will revert back to what similarly ranked employees are paid elsewhere in the company. It is mostly midlevel employees who are affected, including investment bankers, sales and trading, and asset-management personnel, the report says, citing a person familiar with the matter.
Senior staff at Royal Bank of Scotland sparked the biggest one-day sale of the bank’s shares since its government bail-out, as they disposed of £140m of stock issued as part of their bonuses. Of the 650m shares awarded to employees on Monday for their performance in 2009, more than half were immediately sold into the market, the FT reports. While some analysts found the appetite for the shares heartening, some market experts said the interest from institutional investors was subdued.
Bank chiefs’ average pay in the US and Europe leapt 36 per cent last year to $9.7m, according to data compiled for the FT, despite variable performance across the sector. Jamie Dimon of JPMorgan Chase and Goldman Sachs’ Lloyd Blankfein were paid more than 15 times their 2009 earnings last y ear, at $21m and $14.1m respectively — although both received much less than in 2007. In the UK, the chief executives of Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland were awarded cash and stock bonuses valued at more than $26m last year. That contrasts with 2009, when all four declined bonuses in a nod to public and political furore. Full results of the analysis, carried out by Equilar, are available in an interactive presentation.
In a sign that UK bank executives will increasingly be held accountable for their bank’s performance, Lloyds Banking Group on Wednesday signalled it could claw back part of the bonuses given to executives after taking a £3.2bn hit for mis-selling loan insurance, reports the FT. At the bank’s annual shareholder meeting, Sir Win Bischoff, chairman, said the part-nationalised bank was considering whether losses on payment protection insurance (PPI) should affect the pay of those responsible. No UK bank is believed to have reclaimed bonuses since new “clawback” rules were introduced last year. Lloyds emphasised no decision had been taken but said there could be cuts in bonuses that vest in future years. TheSource meanwhile says Lloyds new CEO Antonio Horta-Osorio “laid on much charm but little substance” in his first shareholders meeting.
Jamie Dimon, JPMorgan Chase’s chairman and chief executive, will receive a cash bonus for the first time in three years, as well as about $17m worth of stock, for 2010, the bank revealed in a regulatory filing, reports the FT. Dimon’s stock award – comprised of $12m in restricted stock that cannot be sold before January 2013 and about $5m in options on shares that cannot be divested for at least five years – was in line with the 2009 award. But in 2008 and 2009, as his bank struggled in the financial crisis, Dimon declined a cash bonus. He will also receive a cash payment although the cash portion of his 2010 bonus will be disclosed later this year. The award follows a strong recovery in bank profits and pledges by most financial institutions to link bonuses to long-term performance. In 2010, net income at JPMorgan, one of the winners from the crisis, rose 48% to $17.4bn and earnings per share grew 75%. Last month, Goldman Sachs said Lloyd Blankfein, chairman and CEO, would receive $12.6m-worth of stock as part of his 2010 bonus. DealJournal lists 2010 compensation for CEOs at top US financial institutions.
Barclays has been forced to adapt its plans to pay bonuses for staff with cocos – a new financial instrument seen by regulators as a key tool for rebuilding banks’ capital strength, reports the FT. Under the plans, Bob Diamond, chief executive, had hoped to use the new contingent convertible capital notes, or coco bonds, to pay as much as half of the deferred pay element of bonuses. Barclays had also planned to launch a new issue of coco bonds, which convert to equity at a pre-agreed level of financial stress. But the UK’s FSA watchdog has not yet approved the bonus plan, forcing Barclays to use a simplified synthetic version, which will simply be worthless if its core capital ratio falls below a minimum level, thought to be 7%.
The Federal Reserve, Federal Deposit Insurance Corporation and other regulators are expected to propose on Monday that a high proportion of bonuses for senior executives at banks with more than $50bn in assets should be paid over at least three years, rather than in large annual cash sums, sources have told the FT. In addition to an emphasis on clawbacks and ‘holdbacks’, regulators also plan to force conservative compensation practices on junior staff in particular. Bank boards will be made to identify employees who could put their companies at “material risk” of failure and ensure that their pay is held back for several years, and cancelled if their trading or loans go bad.
Total compensation and benefits at publicly traded Wall Street banks and securities firms for 2010 hit a record of $135bn, reports the WSJ, citing its own analysis. The total marked a 5.7% increase from $128bn in combined compensation and benefits by the same companies in 2009. The rise was driven by a revenue rebound as the financial crisis receded, the report notes. At 25 large firms that reported full-year results, revenue rose to $417bn, another record, even though last year’s 1% increase was a fraction of the industry’s revenue jolt in 2008-09. Buried in the numbers, however, are signs that pressure from regulators and shareholders led to deferred compensation, which made up as much as half of total pay in 2010, up from about a third previously, according to US pay consultants.
Big banks on both sides of the Atlantic are considering whether to follow Barclays as it pushes ahead with a plan to pay bonuses with innovative bonds, dubbed cocos, reports the FT. According to several banks present at last week’s World Economic Forum in Davos, the idea of using contingent convertible notes – which convert into equity when the issuer reaches a crisis trigger point — as a remuneration tool is gaining ground. The FT reported recently that, pending regulatory approval, Barclays aimed to unveil the coco bonus plan next month. European regulators, particularly in Switzerland, look favourably on cocos as a way to boost capital.
James Gorman has defended his decision to defer a larger portion of bonuses for Morgan Stanley employees than ever before, telling staff the bank must strike a balance between their interests and those of shareholders, reports the FT. Speaking at a company forum at the bank’s New York headquarters on Monday, Gorman told staff, “It’s just pretty simple: we have to make sure our shareholders make money at the same time.” Morgan Stanley said last week that an average of 60% of 2010 bonuses would be distributed in stock or cash over the next three years, up from 40% a year earlier, pre-empting steps by European and US regulators to cap immediate pay-outs.
Most US financial services professionals took home a bigger bonus in 2010 than a year ago, despite a year of tepid trading on Wall Street, reports the FT. According to a poll by eFinancial Careers, a financial services job site, 56% of those surveyed reported receiving a higher year-end pay-out, although the average bonus fell 5% to $72,000. While many financial companies have returned to health in the two years since the credit crisis, public anger over bankers’ pay continues to simmer, amid new efforts by European and US regulators to set limits on what proportion of annual bonuses can be paid in cash.
Bankers in New York and London were on Monday night still digesting news that Barclays is planning to pay a large portion of bonuses in the form of debt that converts into equity if the bank gets into trouble, reports the FT. But while the UK bank may be the first to adopt a pay system that includes issuing so-called “contingent convertible” or “coco” bonds as part of employees’ bonuses, it is unlikely to be the last, say remuneration experts. Cocos are essentially bonds with a preset trigger point, such as a bank’s capital levels or another measure of financial stress. Like a normal bond, they pay an annual coupon but if the trigger point is reached, they automatically convert into a form of equity.
A clear split is developing between investment banks that are adopting the spirit of new rules on bonus payments and those that are only following it to the letter, with some deferring payments for almost all staff and others doing so for only the most senior, reports The Source. There is no suggestion that any banks are breaking the new rules, it adds, but some – especially European ones - are applying them more vigorously than others. Citigroup, JPMorgan and Goldman Sachs are understood to only be deferring large portions of bonuses for the most senior bankers, while the likes of Credit Suisse and Morgan Stanley are extending the practice to more junior staff members and, as the FT reports, Barclays has decided to use contingent convertible, or ‘coco’ bonds in its bonus system.
Morgan Stanley has sought to pre-empt new rules capping banks’ cash pay-outs, deferring 60% of employees’ 2010 bonuses, reports the FT. The announcement came as the bank reported a higher-than-expected 88% jump in 4Q profits, despite a fall in fixed income trading revenues. While Morgan Stanley’s 2010 pay-outs may defer more than employees expected, the FT notes the move “reflects the new realities of Wall Street after the financial crisis”. Lex adds that the bank’s CEO James Gorman has made some progress since taking the reins a year ago but warns he has a “busy year ahead”, while the WSJ notes that the results bolster the case for the bank’s push to become a more diversified and less volatile investment house than Goldman Sachs by building wealth management to balance trading.
Britain’s banks are fighting a rearguard action to block disclosure of their top traders’ bonuses, as George Osborne, chancellor, tries to top US pay disclosure rules, reports the FT. RBS and Barclays, which have big investment banking divisions, fear that publicity over star traders’ pay could drive some out of the UK. Osborne’s team is working on a compromise deal to build on the limited transparency regimes in Hong Kong and New York, but some politicians are likely to criticise any solution as too timid. Bankers expect an agreement on a ‘peace deal’ next week. Meanwhile the Telegraph reports that Goldman Sachs’ UK staff will receive a compensation pot worth $430,000 (£269,000) per employee, in a payout that is likely to once again stir tensions between the City and the rest of the UK.
The time for “remorse and apology” by banks over their role in the financial crisis should end, Barclays’ chief executive told a UK parliamentary committee on Tuesday, reports the FT. Under concerted questioning by MPs, Bob Diamond acknowledged public anger over bankers’ pay but argued it was not possible to stop paying bonuses without severe consequences for business and the broader banking sector. In front of a packed house, Diamond rejected repeated demands from MPs that he give up his own bonus, as he has done for the past two years. Lex says it would be best, at this point, to “depoliticise” the bonus question, while WestministerBlog concludes the government has not done much on the bonus issue.
Senior UK bankers have asked the government for immediate guidance on how, and at what level, year-end bonuses can be paid, highlighting growing confusion about the increasing layers of regulation affecting compensation in the financial services sector, reports the Telegraph. The plea, from heads of the top UK high street banks, has been directed to George Osborne, the Chancellor, and Vince Cable, business secretary, ahead of the bonus season which begins in earnest later this month. The bankers, including executives from Barclays, RBS and HSBC, have all asked for some form of clear and precise indications about acceptable levels of bonus payments.