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Opinion

Abigail Hofman: Credit Suisse’s PIP pays out

Credit Suisse’s Performance Incentive Plan (PIP) paid out and some lucky bankers became very rich indeed. I’m not talking 'buy a magnum of champagne' rich.

Playing golf with colleagues might be one management tool for bonding but surely a better method is to create an incentive plan that will pad the pockets and pander to the egos of the elite? In April, Credit Suisse’s Performance Incentive Plan (PIP) paid out and some lucky bankers became very rich indeed. I’m talking about retirement rich not buy a magnum of champagne rich. Chief executive Brady Dougan will receive about SFr70 million ($65 million) and Paul Calello, head of the investment bank, about SFr37 million. But the largesse is not limited to the bosses – I have heard that between 200 and 300 other senior executives will also receive plump payouts.

The plan was introduced in 2005 by former chief executive Ossi Grübel when Credit Suisse was languishing – very much deserving its reputation as "the other Swiss bank". A mole whispers conspiratorially: "It was ironic. But at the time there wasn’t enough cash to go round. So management said to the senior guys: ‘We’ll give you stock’. And we all went: ‘Boo!!’ With hindsight however, the PIPs were a thing of beauty."

There were various hurdles such as return on equity targets and peer share price comparisons to be overcome. One hurdle was the average share price during the first quarter of 2010. "I’m glued to my Bloomberg screen," a mole moaned. "It’s so distracting. I can hardly do any proper work."

Sources whisper that the plan was heavily leveraged. So if, for example, using imaginary numbers, the Credit Suisse share price rose 10% from its 2005 level, PIP holders would receive four times their original entitlement. In the heady days of 2007, these Credit Suisse PIPs were worth so much they proved a real disincentive to hire senior people from the firm. "We looked at hiring one of their top guys," a rival chief executive told me. "We backed away when we realized just how many millions we would have to pay him to buy out the pesky PIPs." Intriguingly, due to the shrivelling Credit Suisse share price during the crisis (remember how it traded at SFr24 in March 2009), there was a period when the whole plan was worthless.

What should we make of this? Credit Suisse argues that the performance plan was designed to compensate, incentivize and retain senior executives and such employees were forced to defer substantial portions of their 2004 compensation. PIPs vested over the five-year period of the plan. In addition, the plan aligned the interests of senior employees and shareholders and there will be no dilution as the shares will be delivered from treasury stock. I agree with all this and obviously Credit Suisse had a good crisis. However, instinctively, I feel that the large amounts paid out under the scheme will be met with cynical shouts of "greedy bankers" from some commentators and will cause revulsion in Switzerland, the land of cow-tending peasant farmers. I will be interested to see which, if any, senior executives leave Credit Suisse in the next few months to sail around the world or spend more time with their families.

Incentive plans, such as the Credit Suisse PIPs, are now deemed an acceptable way to reward bankers as they link large rewards to longer-term results. Incentive plans are meant to bind the senior people of a firm together. But those below the appropriate level must feel alienated: "nose pressed up against the window" stuff. Of course, senior management would argue that the disenfranchised can work harder and become more senior and then they too can participate in such plans. That’s true and that is the way Wall Street has always worked. Finance is one of the few industries were those who succeed can earn significant capital even though they are merely employees.

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