Credit Suisse’s readiness to splash more cash to hire or retain star recruits jars with wilting profitability in investment banking. The extra money that the Swiss bank awards over and above base salaries and annual bonuses trebled last year, to 222 million Swiss francs ($228 million). The intention is to lure the best bankers from competitors and dissuade valued employees from leaving. But this extra pay cannot be cancelled or clawed back and is therefore less able to curb animal spirits than deferred bonuses.
Last year’s increase in special awards partly reflects a change in management and compensation philosophy under boss Tidjane Thiam, who joined a year ago. Thiam received 14.3 million Swiss francs in lieu of unvested shares in his previous employer, Prudential. Other new executives got smaller awards. A bigger factor may have been Thiam’s decision to increase the proportion of bonuses paid as upfront cash rather than deferred awards. His understandable motivation was to gain better control of the bank’s costs.
Still, too many at the Swiss bank received too much in special payments for a year that was anything but special. These sweeteners were given to 925 employees, up from 216 the year before. Even if the bulk went to new recruits who may improve the bank’s fortunes, shareholders will need convincing. Credit Suisse made a loss of 2.9 billion Swiss francs last year and managed an adjusted return on regulatory capital in the first quarter of this year of 2.3 percent – well below a cost of equity that’s probably more than 10 percent.
Investors are entitled to expect pay to drop sharply until Credit Suisse’s bottom line improves meaningfully. Total pay awarded per employee for 2015 was down almost 6 percent year-on-year, almost as much as the 8.5 percent decline in Credit Suisse’s total shareholder return for those 12 months. But banks that cut in-year awards by much more than a fifth risk triggering a stampede – and Credit Suisse shares are down more than half for the year to date. Thiam is out of favour with investors after botching an investment bank restructuring. Clamping down on special pay awards might help him win back confidence.