Over the past year or so, a lot of people have chosen to voluntarily leave UBS, which may have something to do with the fact that people would like to get paid. While a handful of marquee names (within the industry) have been lured with big checks, many senior bankers have heard nary a peep re: bonuses in several years (the staff’s pay overall being nothing to write home about, either), and with morale taking a hit in the wake of suggested layoffs and someone losing the place $2.1 billion, employment with places where you’re robbed at knifepoint look good. The last time staffers inquired about compensation, investment-banking chief Carsten Kengeter told them to put a sock in it. So, some may be a bit gun-shy about bringing it up again. Happily, today brings exciting news. Some people are getting a raise! Read more »
We’ve talked before about the theory that paying investment bankers in stock gives them an incentive to maximize the volatility of their businesses, which is a thing that some people don’t want so much. This starts from the notion that in a 10 or 20 or 30:1 levered bank or broker-dealer or futures merchant, the bulk of the money at risk belongs to the creditors, whether unsecured or depositors or repo or ex-wives or whatever. So it’s plausible to think of the equity as an at-the-money option to buy the assets from the creditors. And as any Level I CFA test completer could tell you with approximately 70% probability, the value of an option increases with volatility. If you own the equity in a bank with $29 billion in debt and $1 billion in equity market value, then you’ll prefer equally likely payoffs of [$25, $35 billion] to payoffs of [$29.99, $30.01 billion], because the higher volatility payoff increases the expected value of the equity (which, after all, can’t go below zero). If, however, you are a creditor of that firm, your preferences are the opposite.
This is all pretty straightforward and orthodox, and it probably ought to inform how you think about the incentives to bankers from owning their bank’s equity, and if you think that way then maybe you come up with ideas like “pay them in CDS” or whatever. On the other hand this theory shouldn’t be taken too seriously. When your entire net worth is in Jefferies stock, “the equity can’t go below zero” isn’t all that comforting.
But it’s worth remembering that incentives from owning equity are not exactly the same as incentives from being paid in equity: people who have a lot of stock feel different from people who stand to one day get a lot of stock. That’s the interesting takeaway from this weekend’s DealBook piece about the fact that bank stocks sometimes go up. (And sometimes they don’t.) For example:
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The Fed has three basic functions: central banking, bank regulation, and calling down police brutality on Occupy Wall Street protesters. While the first function is getting all the attention today, the New York Fed’s blog is spending some time on the second. Specifically, they’re trying to figure out how bankers should get paid.
Optimal design of banker compensation is a thing that people like to think about, and that regulators like to regulate. We’ve talked about it before, and I’ve suggested that the right way to reward bankers is not to give them mostly equity or extra-levered equity, which encourages asymmetric risk-taking, but rather to give them exposure to their firm that roughly matches that of their main stakeholders. Which, for a bank, means basically various flavors of creditors. So a bank CEO whose net worth consists 20% of equity of his firm and 80% of unsecured debt of his firm, like Brian Moynihan, in theory has better incentives to do the right thing by bondholders, depositors and the financial system than someone who’s 100% in out-of-the-money stock options. And a banker who is paid in structured credit products that can’t be foisted on to clients has incentives … well, he’s an interesting case study at least.
I like the NY Fed researcher-bloggers because they’re pretty sober people who want to optimize banking regulation but don’t spend their time freaking out about stupid popular things like how CDS will kill us all, banning short selling, or just generally hating on bankers. So I’m pleased to see NY Fed researcher Hamid Mehran is with me on this whole comp thing: Read more »
Goldman Sachs International has triggered a clause inserted into the employment contracts of a group of its London-based investment bankers in mid-2009 that will result in them having to take a pay cut, Financial News has learned. A number of staff across the investment bank’s European division, which is based in London, have been told this summer that their base salaries will be cut, a source with knowledge of the situation told Financial News. [FN/WSJ]
In 2010, the year he was appointed Bank of America’s Chief Risk Officer, Bruce Thomson’s compensation topped $11 million, making him the highest paid executive at the firm (CEO Brian Moynihan, by comparison, received $1.94 million and former Countrywide CEO-cum-BAC in-house cocktail waitress took home $17,509 in tips**). Does Thomson’s massive package make him stand out when he and his peers in the field attend two weeks of risk camp every summer? Apparently not, because according to a guy who studies such things, risk officers are gettin’ paid. And not only that? People are starting to show them respect. Like acknowledging their existence in the elevator respect.
Citigroup, AIG and UBS are among other companies raising the profile of risk executives. The derivatives meltdown that sparked the 2008 Lehman Brothers Holdings Inc. collapse and an 18-month recession catapulted the role from obscurity to contention for future chief executive officers. “The person sitting in the risk chair now is reporting to the CEO so the caliber has to be higher,” said Neil Hindle, who runs the CRO search practice at Egon Zehnder International in New York. “There has been a real increase in power over the last two years.” That’s evident in the compensation, which can reach $10 million at large financial institutions now, compared with $500,000 as recently as 2001, Hindle said. Five years ago, a CRO typically reported no higher than the CFO, he said. Citigroup Chief Risk Officer Brian Leach said it’s expected he’ll have a seat at the table when Chief Executive Officer Vikram Pandit makes key decisions. A decade ago, a bank risk executive often wasn’t in the room, he said.
Yes, it’s a whole new world for once invisible employees who previously were accustomed to coming into the office several times a quarter and finding someone else at their desk, because HR “didn’t realize someone sat there.” Unfortunately, the pay and the sense that the people you’ve worked for for 5 years know your name isn’t Steve (≠ Tom) will not last long, because according to HBS professor Jay Lorsch, we’ve got about two or three years before people can go back to not giving a shit about you/the work you do anymore. Read more »
As you may have heard, lots of people have been leaving UBS lately, which may have something to do with the fact that people would like to get paid. While a handful of marquee names (within the industry) have been lured with big checks, many senior bankers have heard nary a peep re bonuses in several years (and the staff’s pay overall is nothing to write home about, either), making employment with places like Citi look good. Possibly seeing recent defections to Vikram’s House of Kicks as one indignity too far, management tried to put a stop on the exodus late yesterday. Read more »
As you may have heard, UBS has been going through a bit of a rough patch. Despite posting an annual profit (of 7.2 billion Swiss francs) for the first time since 2006, things just haven’t been the same since the crisis, and some have suggested it never will be, claiming that the bank “doesn’t have a chance” getting back to pre-crisis levels because “too much damage has been done.” Not helping things is the fact that there’s been very high turnover in the last couple months, which may have something to do with the fact that people would like to get paid. While a handful of marquee names (within the industry) have been lured with big checks, many senior bankers have heard nary a peep re bonuses in several years (and the staff’s pay overall is nothing to write home about, either). As one might imagine, tension is running high and recently within the investment bank, there’s been a decision, among those who’ve yet to quit, to air their grievances. The reaction from management? Put a sock in it. Read more »