A nice cup of CoCo December 7, 2010 at 9:08 am
The idea of paying bankers’ bonuses in stock or stock options always struck me as odd. After all, equity is a call on the value of the firm after debt has been paid, and you maximise the value of the call by increasing volatility. Stockholders, then, naturally prefer risky high leverage structures – hardly the behaviour you want in a banker. It would make a lot more sense to force the banker to write the bank a put, so that they are incentivised to prevent disaster.
Now, according to Reuters, Barclays might be about to do just that. Specifically they are apparently looking into paying bonuses partly in contingent convertibles:
These securities are bank bonds that turn into equity when things go awry, for instance when losses mount and the bank’s equity capital ratios fall, thereby boosting capital. So, in essence, adding CoCos to the bonus mix would be a novel way for BarCap to force bankers to contribute some of their loot to their employer’s capital cushion, thereby helping to minimize political opprobrium over pay.
OK, this is not quite as good a paying them in reverse convertibles, but it is a good start. Throw in a five year vesting period, clawback provisions for individual malfeasence, and you have the start of something interesting and worthwhile.