Among various other things, the court judgement concerning the case of Tony Shiret – the ex-Credit Suisse equity researcher who has successfully (so far) sued the Swiss bank for ageism – highlights the weird ways that people working in equity research in investment banks make their money.
Equity research jobs can be very lucrative. Shiret, who worked at Credit Suisse for 18 years, was paid a salary of £350k in 2011 (up from £150k in 2010). He also earned a bonus. The ruling doesn’t specify the precise size of Shiret's bonus, but it does say how it was calculated – and the process seems sort of nebulous.
The court judgement says that pay for Shiret (and, we assume, for other equity researchers at Credit Suisse) was determined using a ‘scorecard’ taking into consideration all sorts of different metrics. These included:
- Profit and loss (50% of the total).
- 360 degree technical skills feedback (10% of the total).
- Help with initial public offerings (IPOs) (20% of the total).
- Annual performance of a model portfolio system, in which teams constructed a theoretical portfolio based upon their stock picks (10% of the total).
- Feedback from the derivatives business (10% of the total).
So far, so good. The problems come from the notion of 'profit and loss,' which accounted for 50% of Credit Suisse analysts' bonus.
According to the court documents, 75% of this profit and loss figure was derived from 'attributed client value added'. Credit Suisse ('the respondent') established this as follows:
In other words, nearly 40% of pay for equity researchers at Credit Suisse was based on the notional dollar value of the services they delivered to clients, based on clients' ratings. It was also determined by whether equity analysts were able to provide investors with access to company management. The first seems inherently subjective. The second was made part of a crackdown by the UK's Financial Services Authority in March this year after the FSA found that investors were spending 'tens of millions a year' on persuading analysts to let them talk to finance directors and CEOs.
Credit Suisse's decision to base a further 20% of pay on analysts' contribution to IPOs is also notable. In 2003, banks in the U.S. (but not in Switzerland) paid $1.4bn in fines after it was proven that their analysts were issuing favourable research notes to help corporate finance teams win IPO clients. By directly linking pay to IPOs, Credit Suisse seems to be inviting similar behaviour.
The court ruling refers to 2011 and 2012, so it's possible that Credit Suisse has changed its process for calculating equity research pay since. The bank declined to comment.
An equity researcher at a rival bank said the 'balanced scorecard' method of paying analysts is common and that most banks would give an even higher weighting to subjective client reviews. However, he said it's "unusual for banks to link pay to analysts" involvement in particular IPOs," adding that this has been banned for some time.