- Credit Suisse staff have lost $1.2 billion on deferred shares
- Deutsche Bank’s 43% decline costs bankers $590 million in pay
Investment bankers at Europe’s biggest securities firms are watching their bonuses melt.
A rout in financial stocks this year has wiped more than $2.5 billion from the value of deferred shares that were paid as bonuses in the past few years at Barclays Plc, Credit Suisse Group AG, Deutsche Bank AG and UBS Group AG, data compiled by Bloomberg show. Awards for staff at Credit Suisse have plunged by more than 1.2 billion Swiss francs ($1.2 billion) on a 42 percent drop in shares this year, as Brexit added to pressure European bank stocks were already facing from costly restructuring efforts.
Bonuses have fallen across Wall Street’s largest firms as revenue shriveled in previously lucrative activities and a large part of year-end payouts for top performers was granted in restricted shares. The worst hit have been employees at European firms, whose sharp stock price declines reflect the region’s economic challenges and -- in some cases -- the banks’ struggles to restore profitable business models.
“If the bank is suffering, the system is meant to work so individuals are aligned to the long-term interests of the bank, so suffer alongside it,” said Jon Terry, a partner and pay specialist at PricewaterhouseCoopers. “This is an entirely intentional consequence of new regulations.”
Banks were already cutting pay before Brexit, staggered by billions of dollars in fines for misconduct. The U.K.’s June vote to leave the European Union has increased the burden, contributing to a 23 percent decline in the Bloomberg Europe Banks & Financial Services Index so far this year, on pace for its worst annual performance since 2011.
The stock rout could have been even worse if not for Europe’s bonus limits. Since last year, bonuses have been capped at double an employee’s fixed salary, prompting many banks to increase salaries at the expense of incentive pay. The average ratio of variable to fixed compensation for high earners plummeted to 127 percent in 2014 from 317 percent a year earlier, according to the European Banking Authority.
For 2016, London’s investment banks will cut bonus pools by at least a quarter, with some staff set to receive nothing, as deals dry up and investors and companies keep money on the sidelines while Brexit negotiations play out, executives and recruiters said in July. Bankers including HSBC Holdings Plc Chairman Douglas Flint have said lower profits will result in smaller payouts for this year, and Barclays Chief Executive Officer Jes Staley said he wants compensation in the future to be “as volatile as revenue.”
“Bankers were bracing for a very bad bonus year regardless, and are now realizing they can’t rely on the stock piece of their comp any more, it’s very fragile in terms of value as has been demonstrated this year,” said Stephane Rambosson, managing partner at executive search firm DHR International in London. “When they see the amounts come through, it’s one more element pushing people away from some European banks, and frankly they’ll need to be creative to fix this.”’
Credit Suisse, which provides the most robust disclosure on its deferred stock, had 136 million share-based awards outstanding at the end of December. It gave out an additional 50 million deferred shares in January, while 62 million of the previous grants were set to vest in the first half of 2016. Assuming no shares were forfeited and vested stock was sold at the highest possible price, the value of the awards has fallen by at least 1.2 billion francs.
“The numbers are incredible, and you should always keep in mind much of the motivation of bankers working in London is remuneration,” said Conrad Pramboeck, head of compensation consulting at executive search firm Pedersen & Partners. “It’s clear the industry has been going down since 2008, slowly dying in my opinion. Currently, it’s still alive, paying extremely high salaries and bonuses, but the whole banking system will have to change. Let’s see how much longer it can go on like this.”
Estimates for other banks’ declines were based on the share awards outstanding at the end of 2015, as they provided less information on stock granted and vested this year. The value of Deutsche Bank’s total has fallen by 528 million euros ($590 million) as its shares have tumbled 43 percent in 2016, touching a record low this month.
The value of UBS’s unvested awards dropped more than $500 million, while the figure including shares already vested exceeded $800 million. Stock in Barclays’s so-called share value plan fell by 200 million pounds ($262 million) as the lender’s publicly traded shares slid 23 percent this year. Officials for all four banks declined to give exact figures or comment on the drops in value.
“It’s been a double-whammy for bankers: the deferred piece is now larger and worth less in outstanding stock, but when you consider what the bonus pool is likely to be for 2016, the same banks we are talking about are going to have an overall reduction in payments anyway,” said Terry of PricewaterhouseCoopers. “And if you work at a U.K. bank, you’re being paid in pounds, which have devalued since Brexit, so it’s a triple whammy.”
The EU requires that at least half of variable compensation consist of stock or securities, and at least 40 percent must be deferred for three to five years. In the U.K., rules are harsher. Senior bankers’ pay can be “clawed back” for up to 10 years, and under the new senior managers regime, executives can be jailed if they’re deemed to have acted irresponsibly leading to a lender’s collapse.
Bankers can take solace in still having the worry of a bonus. Half a million jobs have been eliminated across the financial industry since the 2008 crisis, according to data compiled by Bloomberg. And bank stock valuations hovering near record lows mean share awards granted at the end of this year provide employees with a chance to capitalize on significant upside if the firms recover.
“Compensation across the board is not as good as it used to be,” said DHR’s Rambosson. “But people need to realize they are still in a bubble and most don’t realize the difference in their expectations between them and the real world.”