Wanted: reasonable bonuses for bankers

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It was a hotly debated topic in Parliament’s extraordinary session on the collapse of Credit Suisse: bankers’ bonuses. There was talk of upper limits on bonuses and even the prohibition of bonuses. The Federal Council now has the task of making a proposal that calms the boiling spirit of the people, while at the same time not completely offending the bankers. A task that is not easy to solve.

On the one hand, there are no scientific studies to prove that bonuses really inspire managers to perform better, especially when overpaid. Especially when the tangible share of even the CEO is truly immeasurable in the company’s success. And behind closed doors, even in banking circles, one hears that no one really wants high-performing employees who can only achieve high pay. All of this speaks for a bonus ban.

Doesn’t work without bonus

On the other hand, the necessary cultural change in the financial center cannot be achieved with a crowbar. Bonus-free banking is currently unthinkable. “The banking world is primarily about money,” says compensation expert Sacha Cahn (50). And his colleague Urs Klingler (64) adds: “Variable compensation for performance has more advantages than disadvantages.”

Klingler believes that this is how people work, that they want a reward for good performance. “It’s like winning a gold medal at a sporting event.” However, one should not make the mistake of putting CEOs on par with sports superstars in terms of revenue and image.

No performance, no bonuses

Therefore, it depends a lot on the structure of the remuneration system. “A performance bonus shouldn’t just be a gift to the team,” cautions Cahn. “Bonuses make sense if used correctly.”

So Cahn thinks it’s a good idea to give some kind of conversion bonus after all. “It would make sense to pay key employees at CS a special bonus tied to performance targets so they don’t move on to other banks.” If the integration into UBS goes smoothly, the new megabank will also benefit.

It is clear to both compensation professionals that bonuses can only be awarded if the performance of the individual employee and the performance of the company as a whole are correct. Klingler recommends a three-stage model for this. «The compensation system should reflect performance – that of the individual, department and Group.»

And it imposes an important restriction: “It’s important not to add, but to replicate, individual performance components.” In case of group loss, one of the multipliers is zero – in such a year, employees are not awarded bonuses. This will likely reduce the risk appetite of some managers.

If you lose, the jackpot pot remains empty

It’s an easy-to-understand calculation for most people outside of the financial industry. Also, in other industries, variable compensation doesn’t skyrocket: “In many companies, the size of the jackpot pot is limited to about 10 percent of group profits,” says Klingler.

This system meant that the bonus pot was empty in CS during the losing years. But that did not happen, on the contrary, the bank has not made any money in the last 10 years and has lost 3 billion francs. However, he still paid a bonus of 32 billion francs during this period.

corporate responsibility

Top managers like to compare themselves to entrepreneurs – but rarely act accordingly in terms of income. If things are going badly for the entrepreneur, he gives up part of his salary, preferring to invest the money in the company. Therefore – another idea – a large part of the variable fees for the best bankers should be paid in the form of shares. And they stay blocked, at least until you leave the bank, or even longer. This means that the shares cannot be sold and the bonus increases or decreases with the share price over the years.

This should also reduce the willingness to take risks. Because the executives are in the same boat as the shareholders, such as the financial center and the public, who are deeply interested in the scandal-free and profitable operation of the company.

Source :Blick