Are revelations that SocGen’s bête noire had his eye on a €300k payout yet more proof that bonuses are the root of all evil?
Mesdames et Messieurs, for those who side with Nicolas Sarkozy in calling for more responsibility “in a system of high rewards…”, and for those holed up in La Défense, the case against bonuses is as follows:
1. Folie. Bonus-lust is liable to drive impressionable young (or old) traders to do foolish things sans regard for the potential downside (see point 2). The case in point involves Jérôme Kerviel, who it now transpires may have been inspired to drive France’s finest close to ruin by the prospect of tripling his bonus.
2. Risk. Bonuses are paid on the basis of short-term profits and don’t accurately reflect long-term risks. Voiced by everyone from Martin Wolf in the Financial Times to derivatives trader turned author Nassim Taleb on Bloomberg today, the argument goes that bonuses paid on the profits from CDOs, in particular, didn’t reflect the fact that the market would value them at close to zilch when it came to selling them on.
3. Inflexibility. More flexible than Darcey Bussell on the way up, bonuses have proven strangely sclerotic on the way down. Banks may have written off $104bn (according to Financial News), but Bloomberg says that didn’t stop them rising to a total of $39bn last year. “We were worried that if we didn’t pay, Goldman would pick off our best people,” confesses one comp and benefits professional.
However, while bonuses may appear odieux, it’s not immediately clear what might replace them. “There’s no perfect solution to this problem,” confesses Ian Cooper, a professor of finance at the London Business School. “You need to balance short and long term considerations.”
What about making everyone a partenaire in the business? “The only people who were completely tied into partnerships were the partners and they had unlimited liability, which in today’s environment wouldn’t be a comfortable thing,” says an MD at one European bank.
Which leaves…aligning recipients with shareholders by paying a higher proportion of bonuses in restricted stock, et surprise surprise, banks have alighted on this already.
According to Financial News, UBS is paying anything above $750k in stock, Citigroup is now paying 20% of MD bonuses in stock, JPMorgan is paying 40% of bonuses worth $1.5m in stock, and Merrill will be paying 40% in stock rather than cash.
The comp and bens insider says UBS is to blame: “UBS announced they were paying a higher proportion of stock and suddenly the floodgates broke – all other banks were forced to do the same thing for the sake of their shareholders.”
A lot of the new stock is restricted for only 12-18 months instead of the standard three years. That may change: “Paying stock is a cheap option for banks because it can be expensed over the vesting period. If profitability falls again this year, the vesting period will need to be lengthened,” says Mr Comp and Bens.
Calls to send bonuses to the guillotine may therefore be unnecessary: they are already en route.