Switzerland’s second-largest bank has planned an interesting system of bonuses to stop short-term thinking among executives. The bank plans to pay its bonuses in the form of bonds that can be eliminated if the company’s capital falls below a level that compromises its common equity ratio.
The decision, which has been widely discussed by financial analysts, is a new change in an industry that’s often known for its hefty bonus payments to high-level workers and executives. Credit Suisse plans to give out approximately 20 per cent of its 2013 deferred pay for managing directors and high-level executives using the bonds.
Other Swiss banks have adopted Credit Suisse’s strategy of paying employees using a combination of traditional bonus cheques and contingent capital. UBS AG is doing the same as part of a long-term strategy to raise additional capital by 2019 and keep its regulatory requirements in order.
In an internal memo, Credit Suisse stated that it hopes the new compensation deal will “satisfy key stakeholders while also allowing us to compensate our employees fairly and competitively in today’s environment.”
Swiss banks believe that they can increase capital by as much as 1 percentage point each year by using the contingent bonus system. Rival Swiss bank UBS paid its high-level executives and directors an astounding 500 million francs ($558 million) in its 2012 bonus pool.
Credit Suisse is Switzerland’s second-largest bank, but that hasn’t pushed it away from exploring alternative means of compensation in the past. The bank has given out bonuses for reducing risk at the bank, as well as increasing executive bonuses given out to employees that boost the bank’s capital.
Other banks have also used Credit Suisse’s contingent bonus strategy. Barclays Plc gave out part of its 2010 bonus payment in the form of a “contingent capital plan” that deferred bonuses for three years based on company performance.
