Springtime brings shareholder meetings and the annual flagellation of bankers over pay. Those fanning the flames of popular ire haven't always thought their case through, finews.com's Jeffrey Voegeli writes.

Shareholder advisers like Glass Lewis and Ethos take a matter-of-fact tone: compensation reports at UBS and Credit Suisse are to be rejected, they argue. These recommendations are accompanied by an annual ritual of popular outrage and indignation in media and the public over «obscene» pay – in Switzerland, the U.K., or the U.S.
 
To be clear, it is doubtful that one person alone is as valuable as to warrant Jamie Dimon's $31 million pay package last year from J.P. Morgan, or UBS CEO Sergio Ermotti's $14 million – but this commentary isn't about that question.
 

Shared Blessings 

A look at several elements which are regularly forgotten in the wave of disgust over possibly undeservedly high pay would enable a more balanced view. Firstly, shareholders or the wider Swiss populace – the two are nearly identical in this context – aren't going to be worse off if Ermotti or his counterpart at Credit Suisse, Tidjane Thiam, pay themselves and their top executives better.
 
Neither UBS nor Credit Suisse is going to lift the salary for an average bank employee if CEOs take a cut. And salaries in other sectors are obviously also unaffected by any cuts, voluntary or forced.
CEO and top executive pay are emblematic of the fact that bank employees in Switzerland still earn more than others with comparable jobs outside the finance industry. This spawns jealousy, but it also keeps afloat an armada of providers in law, technology and IT, consulting, and other industries directly tied to the banking sector.
 

Bankers are Machines

The concept of bonuses seems a troubling one for many observers, besides the overall level of pay. Bonus totals, or so-called pools, are ritualistically compared to the profit of a particular bank.

The ratio between the two delivers a juicy headline – tabloid «Blick» immortalized one «Ospel» as the 24 million Swiss franc ($23.9 million) payday the chairman of UBS at the time, Marcel Ospel, took home in 2006. But it ignores a key aspect: employees are the finance industry's most important generator of revenue. Unlike in manufacturing, flexible or «variable» pay in industry jargon has the advantage that it adjusts quickly to output.

Short-Term Arguments

Cutting bonuses in relation to fixed salaries would make employees more receptive to offers from competing firms in good years, but also overpay them in bad years. If used sensibly, bonuses help marshal staff – from the CEO to a green University graduate – towards a common goal, and hold them accountable. This helps encourage long-term thinking in behaviors and actions.

This long-term view is missing in the key tenet of Ethos' and Glass Lewis' recommendations: the feeble share price. The proxy advisers seem to have forgotten a $90 million payday for ex-Credit Suisse CEO Brady Dougan in 2010 under two different payout plans.

Warning Signs

If protesters demand bonuses be cut when share price performance languishes, as that of both UBS and Credit Suisse has under Ermotti and Thiam's tenure, respectively, then they shouldn't have a problem with higher pay when a stock rises. Axios Financial, a puny U.S. bank which awarded its CEO $34.5 million last year, illustrates how well that works out, as «Bloomberg» reported.

Such incentives, of course, would encourage CEOs and executives to think about where their share price is, instead of longer-term criteria which boards have sought to cement into their bonus practices. Investors and executives would probably welcome a share price-focused view – but it wouldn't sit well domestically.

Swiss Bloodletting?

For example, Ermotti has explicitly ruled out another major round of bloodletting at UBS – though it would be the quickest way to perk up the bank's margins. To save the most money, the CEO would have to cut employees in Switzerland, one of the most expensive labor markets in the world. The stock, most of which is in the hands of U.S. and British investors, would surge – but not for reasons that bonus critics would welcome.

This begs the question of what the protesters actually want. Shareholders are free to sell their stock at any time if they don't agree with a company's pay or other business practices.

Bonus System Works

Switzerland is also one of the only countries with a binding vote on pay (though the backers of the initiative claim it has become toothless in its rollout). Shareholders have only voted down pay once: at Julius Baer in 2013, one year before the five-year-old law came into effect.

Nevertheless, the vote illustrates that the system, broadly, works. That's why the pay criticism rarely manages to do more than pierce the thin skin of top executives: it is rooted in discontent that a high-flyer earns a high multiple of the average Joe – even though he or she would probably not say no to the same offer.