Banking bonuses: trust, don’t verify

By:
Jon Macaskill
Published on:

CEO Stuart Gulliver helpfully explains HSBC’s former practice of using a Swiss bank account in the name of a Panama registered corporation to take bonus payments for the Hong Kong bank.

Further reading
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Gulliver and Flint face prisoner’s dilemma at HSBC
"Trust, but verify" was a translation of a Russian motto that Ronald Reagan turned into a catchphrase of his own when negotiating with Mikhail Gorbachev and other Soviet leaders over nuclear arms control.

HSBC CEO Stuart Gulliver seems to have believed that his colleagues were able to do far too much verification of bonus payments in the years when he was Hong Kong based head of global banking and markets at the firm.

That at least was his explanation for his former practice of using a Swiss bank account in the name of a Panama registered corporation to take bonus payments. Gulliver helpfully explained that the way the bank’s systems worked in Hong Kong in those days would have enabled his local colleagues to see the size of his annual bonus had it languished there, while the use of the Panamanian corporate was purely to ensure that another set of cherished co-workers in Switzerland would not be able to take a peek as the money went on its travels.

A prudent belt and braces approach to ensuring that banking secrecy starts at home and continues abroad, you might think, though the explanation has certainly not helped Gulliver to calm the furore over creative tax avoidance steps taken by HSBC’s Swiss private bank in the past.

Bonus payments have always been the most sensitive area in investment banking, ranking well above client confidentiality at some firms.

There is still no disclosure of individual bonus payments below board level, even in an era of intense scrutiny on compensation and additional information on aggregate payments to key staff.

That leaves boasts about bonuses by individuals and selective leaks by senior executives about levels paid to their subordinates as the two main sources of information for bankers, who are understandably keen to establish that they are not underpaid relative to peers.

Gulliver clearly did not fall into the sub-category of boastful trading head with a penchant for disclosing his own bonus details in a Hong Kong bar. But as a veteran markets executive in the years before he ran first HSBC’s investment bank, then the group, he obviously became expert in managing expectations among sales and trading staff.

Judicious use of percentages and broad measures of bonus pools is key to this expectation management. Some communication between peers is inevitable and departing bankers often share additional details with former colleagues when they leave a firm, if only out of mischief.

So an experienced markets executive learns to keep outright disinformation to a minimum, when dealing with subordinates. Disclosure of too much information is another obvious pitfall, and this is presumably where Gulliver felt that details of his own payouts might prove to be a distraction for junior staff.

A soundly argued case for restraint in bonus payments can be undermined if an ambitious young banker learns that the head of markets has already personally secured a hefty proportion of the entire bonus pool. Better by far to leave the junior staffer with the impression that he or she is outperforming the peer group, with the prospect of so much more to come.

One irony of the focus on Gulliver’s current compensation, which is fully disclosed now that he is CEO at £7.6 million for 2014 (fully taxed!), is that it is likely to fall below his peak earnings in his former incarnation as a head of markets when life was easier for bankers. 

Other banking CEOs who also formerly ran trading businesses, such as Brady Dougan at Credit Suisse or Anshu Jain at Deutsche Bank, must be sorely tempted at times to point out that they are earning much less today than they did in the past, never mind being forced to take most of their compensation in slowly vesting, often underperforming, bank shares.

But they know that would send the wrong signal entirely.