Less bonuses, more clawbacks: UBS imposes pay model on former CS employees

Repurchase/clawback: Not worth much at Credit Suisse

Rogue London banker Kweku Adoboli triggered a shakeup at UBS in 2011 with high-risk trades that led to huge losses, ultimately leading to the resignation of CEO Oswald Grübel. As a result, in 2012 his successor Sergio Ermotti introduced the possibility of taking back payments already received, known as clawback. These should also apply if a unit is in the red, as was the case with the investment bank in 2012; UBS then demanded half of the jackpot back from the top earners. As the Wall Street Journal marveled, it’s one of the biggest recourses banks have ever seen.

CS saw no reason for such a risk brake, but continued to rely on all kinds of financial incentives. The industry portal “E-Financial Careers” wrote: “The best bank for bonuses that do not need to be returned is Credit Suisse.”

Eleven years after the Adoboli case, in 2022, CS implemented this clawback option not voluntarily, but at the behest of the US Securities and Exchange Commission (SEC). The bank reluctantly wrote in its 2022 remuneration report that “minimum standards for clawback policy” would be introduced as required by the supervisor.

Whether Ermotti will now implement this principle of rollback after the immediate takeover of CS is a matter of debate. There are even plans to take legal action against UBS in court. But Ermotti has clear ideas: “It should be easier for the bank or the supervisory authority to take action against people who grossly neglect their duties,” he said at a podium in Zug recently.

Pension fund: Please do not dilute or redistribute

UBS and CS pension funds are strong players. In total, 38,000 insured people (including 20,000 from UBS) and 27,000 pensioners (including 16,000 from UBS) are counted. The vaults are successfully managed and have solid reserves as of the end of 2023.

Now that it is clear that CS Switzerland will not be independent and will be integrated into UBS Switzerland, the same should apply to pension funds: the two become one. CS pension fund confirmed a merger is currently under review. However, it definitely wants to prevent the “dilution”, that is, deterioration, of the high coverage rate of 130 percent. Reference is made to the merger of the Bankgesellschaft and the Bankverein in 1997; Here, pension fund surpluses are paid separately to the insured by the bank. He does not want to change this in case of a possible merger.

But it’s not that far yet. But given UBS’s integration strategy, it would be a surprise if a merger didn’t happen sooner rather than later. This reduces complexity and reduces costs. And: The merger would create the largest pension fund in the country, ahead of Migros, Coop or the federal government.

The timing of a possible merger is a matter of intense debate

However, there is a difference in the merger: In UBS, the employer contribution is higher, but the conversion rate is lower. Meanwhile, the plans for CS 1e are also known; It allows managers to invest their non-compulsory retirement savings as they wish and increase their equity share to 75 percent under full risk. In addition, redistribution to other insured persons within the PK is also prevented. All contents fit perfectly into Credit Suisse’s free banking. This introduced 1e offerings subito following regulatory approval in 2020. UBS is different: It abandoned these savings plans after a thorough review, research shows.

There is a lot of discussion about the timing of a possible merger in CS, because in this case the shares in the 1e solution will have to be sold. This could be disadvantageous in a downturn in the stock market. Theoretically, it will now be possible for UBS-PK to offer the 1e solution for incomes above 132,000 francs, also for management personnel in the non-compulsory field. As a bank, it already offers this to its customers in the UBS Optio-e collective foundation – “our modern solution in the field of non-compulsory occupational pension provision”, as the bank advertises the offer.

Bonus: Greed at Credit Suisse

Credit Suisse has always been creative when setting bonuses. If CS had turned the corner under Ulrich Körner, a special “Transformation Award” would have been paid. 70 million francs for management, 280 million francs for top management and 200 million francs for middle management. There was also the STI program, Long Term Incentive Award (LTI) and “Sharing Rewards”.

CS was also in a class by itself when it came to “risk takers”, i.e. rainmakers: it had 1,450 of these major players in its ranks, and they received €2 billion every year from the bonus pot alone. The larger UBS got by with half the number of risk takers, or 675 people. The result of the last eleven years: While CS paid over 40 billion in bonuses, shareholders were left with crumbs.

Those who see no future with the new UBS have been looking for a quick exit for several months. That’s what CS staff in London do, according to the Financial Times. They want to leave without being given a bonus. Because they are afraid that they will have to pay taxes on the variable salary part in 2024 and will face the risk of repayment in a few years. Blue letter recipients are better off because UBS is committed not to go after bonuses already paid to those laid off.

Former CS squads fire at Finma

It is unclear what will happen to the retention bonuses that CS generously promised under Körner in 2022. We are talking about 800 million in total. These bonuses must be paid over the years unless canceled in advance. It’s not a good deal anyway, because their share will now be paid in UBS shares at a 23-to-1 conversion ratio.

There is also a legal problem here because former CS staff are attacking Finma. He called for the cancellation of the AT1 bonds, which would also eliminate hundreds of millions of deferred bonus payments dating back to 2014 under the “Contingent Capital Award” (CCA). After all, CS had correctly warned in the “Compensation Report” when the CCA scheme was introduced: If a major incident occurs, “they will lose their value and be written down to zero”. Maximum penalty for a bonus-focused CS banker.

Because senior managers in the bank are socialized in a completely different way; They collect what they can. Finma dryly notes in its CS analysis report for 2023: “For all these years the bank has set the wrong incentives with high variable wages, which over time approach a fixed salary, leaving short-term monetary success to the detriment of the bank.” Developing a healthy risk culture. Even in 2022, the year of bankruptcy, there was no need to step back. Although the annual result fell to minus 7.3 billion francs, variable charges remained at 1.75 billion. The bank likes to repeat its most important principle in every compensation report: “Pay for performance.” Until their death.