Compensation Watch: Credit Suisse's PAF Program

Wow. Seriously, wow…

This year, up to 80% of the stock portion will come via what Credit Suisse (CS) is formally calling a “Partner Asset Facility,” (PAF) of the illiquid assets, largely corporate loans.

Bankers won’t receive a return on the PAF program for eight years, although they can start to collect some of the principal in 2013. If the firm finds outside buyers for the assets, it will pay the proceeds to itself first, then provide the rest to employees.

The PAF applies only to senior bankers within the firm’s investment bank, which includes merger advisory, capital markets and leveraged finance. Those in Credit Suisse’s private bank and asset-management division aren’t subject to the PAF.

I’m going to play both sides of this one… But, how do you know it’s a good move? Hiede Moore’s post, in the next line, offers the proof:

The announcement elicited livid reactions from senior bankers, many of whom questioned whether it was legal. Many said they believed they were being unfairly punished for risky assets bought by colleagues in distant parts of the firm.

I’m not crying for these bankers, exactly, but they missed the point. To be honest, it’s a tremendous incentive for everyone to work together for the good of the firm. These same “livid” investment bankers, I’m sure, have been pushing transactions onto their counterparts in capital markets and trading for years. I know this, specifically of C.S.F.B. Their investment bankers would constantly use the “relationship” reason for doing a given transaction that resulted in real estate exposure for their firm (or leveraged finance commitments). So bankers, as a whole, shouldn’t say they are being unfairly punished for their colleagues' decisions to make loans that they asked them to make. Now those bankers will not push loans they think might make it into their compensation! (There was a rumor that something like this happened a long time ago at Salomon Brothers.)

Now, why might this be a bad idea? Honestly, all the reasons are highly technical. First, the investment is much longer dated than normal equity: first principal distributions come in 2013 and the investment will be zero-return for 8 years. This is a bit unfair, as the vesting and return of cash should be similar to normal equity plans if employees are given no notice. It’s only polite as it concerns things like paying college tuition.

That being said, this is a program for senior employees and, thus, they should have planned for bad times and not gambled with their entire lifestyle. The two largest issues, though, are where the firm is using this to their advantage instead of being “just” about it. First, Credit Suisse pays itself before employees. That seems tacky... pro-rata, maybe? Even pro-rata with the firm counted more… Second, this makes C.S.F.B. employees much less mobile. When a bank is trying to figure out how to make the bankers being recruited from C.S.F.B. whole on what they lose when they depart their current firm (standard practice), it’s likely that their P.A.F. holdings will be valued at, or near, zero.

Now, despite the problems, I think this is a great lesson and a fair mechanism. And, unlike the clawback, if the firm loses money on the investment, so are the people getting paid in P.A.F. units… So you don’t have to worry about going after an employee, they get reduced along with shareholders.

Comments

[zalo:]

I think that it is completly incorrect to treat employees of the investment banks, like Merril, or insurance companies like AIG in the way it is beeing done. For example, John Thain, he saved Merrill from collapsing and he came to Merrill from a stable position at the NYSE when everything was pretty much imploding. Why wouldn´t he be granted a bonus for his great job? Is anything of this debacle his fault? Or is this the fault of the prior very senior management and shareholders who failed to oversight adequatly their business? Or is this the fault of the government who failed to regulate adequatly?
Every time i hear that bank employees must get their bonuses cut, their end of year parties closed, their job trips foregone, and being critized, etc, i feel that there is a lot of unfairness in it, and that in reality it is not based on the financial debacle, but by the envy a lot of people always had on this bankers group.
AIG employees deserve what they would deserve in any other US company. They did the job that was required from them, but because a wrong decision taken at the head of the corporation, now they have to work practically for free and sacrifice themselves?. That is nonesense.
Do Credit Suisse employees had really anything to do with the management decision to get into the illiquid instruments they are now going to receive?
All this is witchhunting at the professional level that was not responsible for the debacle. People should look for accountability at the government who failed to regulate adequatly and at the board and shareholders of the banks that decided to get into risky assets.
If a country looses a war, it is no the fault of their soldiers, or the middle rank officers. It is the fault of their generals and leaders.

2008 Dec 20 08:42 PM

[otbricki:]

Cry me a river.

Lots of hardworking people in this world are taking it in the shorts because of the financial industry screwed up. I bet none of these senior bankers are losing their health insurance or pensions or are wondering how they are going to pay for heat this winter.

Not to mention the long term effects on Joe Taxpayer who has had to pony up 5 trillion to cover this mess and has seen his 401K get a 50% haircut.

2008 Dec 20 09:26 PM

[OldLimey:]

Why do these bums need bonuses at all? Most get what by any rational standards is a damn good salary, why do they need more? 'To incentivise them' did somebody say? If a six-figure salary isn't enough incentive to do a decent day's work, kick 'em out and get somebody else. The world is stuffed full of talented people who never get a leg up on the gravy train, and there is simply no need to remunerate western bankers (or other senior corporate executives) at the obscene levels we're seeing today.

2008 Dec 21 11:00 AM

[zalo:]

Even though i agree that investment bank employees earn quite a good amount of money, probably higher than the average guy at the street, there are other industries that can do quite the same (or more) amountof money. Lawyers for example, they do millions and they probably receive the same aversion from the street guy. Doctors also do a huge amount of money. You would probably say that they do things positive for humanity, but what about plastic surgeons ? hardly you can say that they add value to the world.
Still, i think that a lot of people in the financial industry are suffering due to decisions that weren´t in their power to take or to solve.

2008 Dec 22 12:46 AM

[otbricki:]

Lawyers and Doctors aren't getting a 5 trillion dollar bailout at taxpayer expense.

2008 Dec 24 12:44 PM