As Wall Street looks forward to a new era of blowout bonuses, the unthinkable is happening, at least at Credit Suisse, the big Swiss bank. It said on Tuesday that it would radically change the way it paid its employees.
In a break with longstanding industry practices, Credit Suisse intends to alter the mix of salaries and bonuses for its top employees, tie the bonuses to a specific financial measure and effectively claw back the payouts if the bank’s fortunes dim.
The move will not necessarily reduce compensation at Credit Suisse, which is moving aggressively to compete with American banks on Wall Street. But the shift nonetheless brings Credit Suisse in line with pay practices endorsed in September by the Group of 20 nations and puts the bank ahead of resurgent rivals like Goldman Sachs, some of which are contemplating similar changes but have yet to make their plans public.
Goldman, for its part, announced new pay principles in May, which it says embrace best practices on compensation.
A year after Washington rescued the financial industry, bonuses are once again front and center as some big banks roar back in profitability. Goldman, for instance, is on track to award bonuses that could rival the record payouts it made at the height of the boom.
But the likelihood that Wall Street will enjoy big paydays as many ordinary Americans are struggling has angered some policy makers and created a public relations headache for banks. Many are struggling to defuse the resentment directed at the industry.
The Credit Suisse plan will cover roughly 2,000 employees in the United States. Top executives will receive a greater portion of their total compensation in the form of their monthly cash salaries, while bonuses will be split evenly between cash and stock.
The stock will vest over four years, and the cash portion will pay out in three. But both components will be adjusted based on the bank’s performance over that period, with a particular emphasis on its return on equity, a closely watched financial measure. The performance of an executive’s business will also be taken into account.
By tying payouts to a specific measure like return on equity, Credit Suisse will essentially be able to take back bonuses in the event the bank’s fortunes take a turn for the worse. Credit Suisse earlier introduced a bonus plan linked to some of the bank’s troubled assets.
Claw-back provisions are becoming increasingly common on postcrisis Wall Street. Critics say the industry’s decades-old bonus culture, which focused on short-term profits, encouraged the excessive risk-taking that led to the crisis. Morgan Stanley introduced provisions for a portion of its employees’ bonuses last year, and another Swiss banking giant, UBS, imposed similar rules on deferred pay.
But Credit Suisse executives and compensation experts said the bank’s plan was the most detailed and comprehensive yet to take back pay if senior executives — and the bank — failed to perform adequately.
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“As far as we know, we are the first major bank to announce a compensation structure that is consistent with the best practices laid out at the recent G-20 summit,” Brady W. Dougan, chief executive, said in a statement.
The bank is also introducing a minimum share ownership requirement for members of management committees and the executive board to align the most senior executives’ pay with shareholders’ interests, although it did not specify the new thresholds.
Lynn A. Stout, professor of securities law at the University of California, Los Angeles, said Credit Suisse’s four-year stock deferral was at the outer limit of what many banks were considering.
She said many other banks were thinking of changing compensation practices along similar lines to rein in practices that made multimillionaires out of many financial executives during the housing bubble.
“You get a sense that there is a cultural shift in boardrooms and a new awareness about looking to the longer term,” she said.
At a meeting of the G-20 last month, leaders agreed on recommendations to defer bonus payouts for several years and reduce the incentives for people to take short-term gambles, although they avoided any explicit call for a ceiling on remuneration. The return to big profits at some banks and big bonus payouts, even at firms that received billion-dollar federal bailouts, has raised questions about whether compensation should be even more tightly controlled.
In the summer, the Securities Industry and Financial Markets Association, a financial industry trade group, put forward guidelines on best practices, which included tying bonuses more closely to long-term performance and a more independent role for bank compensation committees.
The Federal Reserve is now preparing to release its own guidance on compensation for the more than 5,000 banks it regulates. It would cover staff at all levels within banks, not just at the most senior levels, and would apply to Goldman and Morgan Stanley, which became bank holding companies last year.
In broad scope, the new rules being considered depart from the largely hands-off approach that dominated bank regulation in the United States for the last three decades. They give banks freedom in how they structure their compensation. The rules are intended to inhibit pay plans that encourage reckless behavior by rewarding only short-term gains. But they would not stop million-dollar pay packages or address issues of fairness.
The stimulus bill that President Obama signed into law this year restricts companies that accept federal bailouts from paying bonuses that exceed one-third of an executive’s total annual compensation.
Now, Kenneth R. Feinberg, the administration’s pay czar, is due to publish by Oct. 30 his finding on pay at the seven major banks that still have not returned large amounts of federal support.
His report will include judgments on the 25 most heavily compensated executives at each of the banks — citing pay levels and composition of pay, and whether compensation is properly aligned with performance.