Credit Suisse has notified its employees that they might have to wait until 2021 to cash in on bonuses awarded two years ago. Under revised regulations, millions of pounds worth of rewards that were expected to mature by 2016 may be deferred for a further five years.
Bringing the bank’s reward scheme one step closer to getting rid of a reward system that was too closely linked to risky assets. Though the move was prompted by changes in capital regulations, it is certainly a step in the right direction for Credit Suisse.
By linking employees’ bonuses to the bank’s performance overall and in specific areas ensures that bankers work for the bank rather than for their bonuses
The bonus scheme being phased out was originally offered to around 5,500 senior bankers in 2012, all of whom must now chose a replacement plan. According to a memo sent to staff at the bank’s Canary Wharf outpost, the scheme was ‘linked to a portfolio of the bank’s credit exposures, and provided risk offset and capital relief to the bank. Due to regulatory changes, this capital relief is no longer available and accordingly, [bonuses] will be amended in accordance with its terms’.
Credit Suisse will offer two replacement bonus plans; a Contingent Capital Award (CCA), in which their bonuses would be awarded as bonds of sorts, which would be wiped out if the bank’s levels of capital drop below a certain point. “Settlement would occur either by a cash payment of the fair value of the CCAs at a time or a physical delivery of an actual contingent capital security able to be held thereafter or sold in the market,” explains the memo.
The second option is linked to a Capital Opportunity Facility (COF), in which bonus payments are linked to the a seven-year facility ‘that is linked to the performance of a portfolio of risk transfer and capital mitigation transactions chosen by the PAF management team,’ explains the memo.
By linking bonuses to performance and by deferring payments for several years means that these payments become more like rewards that must be earned rather than a negotiated part of a pay package. Though deferred pay is already widely practiced by most major banks, remuneration remains a contentious issue in the wake of the global financial crisis.
By linking employees’ bonuses to the bank’s performance overall and in specific areas ensures that bankers work for the bank rather than for their bonuses. Furthermore, by separating bonuses from risky derivatives employees are less attracted to these tools, and that can act as a powerful disincentive to overindulge in this type of activity.