Credit Suisse is
paying its top executives in illiquid mortgage-backed securities. I've no doubt that someone, somewhere, will find a way to complain that it's not fair, but it strikes me as a very good idea. If the things really are any good, they make money; if not, they take a bath along with the rest of us.
Yes, it also preserves CS capital, while moving current cancer off its balance sheet. And the recipients might be quite happy down the road, when that cancer is rediagnosed as gold.
Whatever person on the board thought this one up should get a very big bonus in cash.
This entire economic crisis seems to be caused by a massive agent-agency problem. Putting future income in the form of the securities that they are selling, might solve the problem
This is brilliant - it would solve so many problems.
If we look back at the dot-com bust if the i-bankers had been paid in stock, with a five year vesting scheduale, rather than in cash, for an IPO, there would have been far less excess.
Wouldn't it make sense, from the perspective of a share-holder, to pay executives with a mix of securities that exactly match the positions the company is taking at the time? Sure seems to better align the executives' interests with share-holder interests. Would a world where this compensation scheme was the only lawful way to pay executives in the financial industry be better or worse than the million pages of new regulation we're about to get?
Well, I'll bite--they're paying *bonuses* in this form. If the securities turn out to be garbage, those execs are hardly taking a bath, because they have presumably already received massive cash salaries.
Even so, Matt D, bonuses are the main form of compensation for people in this industry. Their salaries are nothing to be scoffed at (and are obviously well above the median salary), but they are hardly massive compared to the bonuses. I think this is a brilliant idea.
In addition to all the above, it also hopefully (ojala) is yet another reason why TARP is less likely to start buying this junk. Though if Goldman follows suit I'd want to keeo a very sharp eye on Paulson and the remaining $350 billion in TARP.
http://www.career-executive.com/archives/37 has some info on executive compensation at CS. Again, someone receiving $10+ million in salary is by no means taking "a bath along with the rest of us" if their bonuses are paid in worthless securities.
I think that's awesome - a lot of that stuff will be worth more than its current mark-to-market, though a lot less than its face. It gets it off CS' books and saves them from paying cash.
Just a note on bankers' bonuses - in a lot of cases they are directly tied to the deals that they do, basically like sales commissions, so to not pay them is like stiffing your salesman of his commissions (the merits of such a system are a separate discussion). Even in this down market, some deals are getting closed.
I'm just wondering what the catch is. I don't for one second believe that this is as good a deal as it sounds right now--maybe because the industry has proven itself less than reliable, or maybe because I'm just a cynic when it comes to this kind of stuff--but I get the feeling that there's more to this story than is being told right now, and that the people who look like they'll take a hit, won't.
How will they value these in their income taxes, I wonder.
The (reasonable) objection to this pay scheme is that employees are being unfairly punished for others' bad investment decisions when it comes to bonus comp.
To TC:
That's actually not a reasonable objection. Many businesses don't give bonuses at all when they have bad years, and that affects people who aren't to blame along with those who are. CS might not have given out bonuses this year had they not come up with this. It's not reasonable to complain about a potentially worthless bonus when the alternative is no bonus at all.
It makes me think that these securities likely have value after all.
Jaime Roberto -
"It makes me think that these securities likely have value after all."
Almost cynical enough. How about this as an idea: some of these securities have value. Specifically, the ones that are being given to the executives (who decide which ones to give away).
I'd put a few million dollars on a long / short going long on the securities that are being given to execs and short on the securities that are being held on the books of the company (returns on such a portfolio would be entirely dependent on the difference between the prices of the two groups).
now if only we could pay congress in 20-year T-bills
Holdfast:
When you pay an industrial salesman, you know he's made money for you.
But when you pay a banker for making a loan, you don't know if you've made money until it's paid off.
Cash rewards for cash profits only.
GAAP accounting requires far too many assumptions. For financial firms, GAAP is worse than meaningless, because it creates the APPEARANCE of rational reporting.
Wow, this sounds like a great deal for the execs, in my opinion.
Here are the facts as I see it:
(1) the executives really can't, from a PR prospective, take a cash bonus this year anyway, so anything is better than nothing
(2) I suspect strongly that the securities are being valued at the VERY LOW current level which is defined by the lack of a market for anything risky
(3) risk tolerance will eventually improve and these securties will be worth a integer multiple of what they're worth today
What a deal!
Plus, since these securities are generally illiquid, they have no cash value, therefore cannot be taxed until they appreciate and are sold.
Couple housekepping points: It's really not right to call them all "execs", mosts MDs and especially Directors are not necessarily all that senior, the are senior deal team members but not really making strategic management decisions - banks are title heavy. And for most of them their base is a fraction of their total comp, which is part of the reason the bonuses are so big.
Still, it seems like a fair trade in this environment, although the article mentioned the bonuses are first loss with outside investors and the bank also providing capital. If so I would think it depends on how they are marked when they are contributed to the facility - if they are marked at current marks someone probably gets a payout, if they are contributed at par and the bonus pool is first loss its probably an attempt to avoid saying here's a zero.
And going forward I think it is an interesting way to align bankers long term interests with their comp.
Better yet, pay them a never-ending-supply of Chrysler Sebrings. Tax free. That should teach them the true meaning of the auto bailout.
Ursus,
Make that T-bills that aren't inflation adjusted (the EEs, perhaps?).
Robert Arvanitis,
You are incorrect. Many bankers do make cash profits. A good fraction of bank revenue comes in the form of fees. Those fees are cash revenue. For example, completion of an IPO involves a large amount of fees with little to no back-end risk to the bank.
The counterargument is that only a portion of the bank created these problem securities. The corporate finance bankers ("i-bankers") and equity dept (equity "sales & trading") in theory had little role on CSFB loading up on MBS, ABS and leveraged loans, and yet those folks are now being saddled with those products in their bonus pool. Furthermore, CSFB itself gets first claim at any cash generated by this pool. So the actual payout to compensation will be long in the future.
It's hard to argue that anybody deserves a rich, cash bonus this year. And this is inarguably clever for CSFB, assuming it gets away with it (i.e., its human capital doesn't quit) -- in addition to all the reasons above, this frees up all the cash reserved to pay cash bonuses.
But CSFB is clearly taking a risk in paying its people what is perceived by the recipients to be no bonus. They quit, and in a human capital business, it's risky playing chicken with your own employees. Among other things, a firm which develops a reputation for playing hardball with its employees means the latter will become more mercenary -- why look out for the greater good of the firm if you hate the firm? -- the opposite of the intended effect.
And just what should the compensation be for race hustlers and "community organizers" that extort banks into lending to people who should never be lent to?