Banking: What Santander’s failure to appoint Andrea Orcel as CEO means for the industry

News and opinion on finance

Andrea Orcel and Ana Botín

Andrea Orcel’s eventual non-appointment as chief executive of Santander will, in time, rank high on the list of dysfunctional succession plans in an industry known for some spectacular failures.

Jaws hit the floor in September when Orcel, the epitome of the investment banker, was named as the putative CEO of commercial- and retail-banking focused Santander.

It seemed an unlikely fit, despite the close professional relationship Orcel had developed with executive chairman Ana Botín across decades of advising and doing deals together.

Jaws went through the floor nearly four months later when it was revealed that Orcel would not be joining after all.

At issue was the amount of deferred compensation Orcel had accrued during his seven years at UBS. Industry estimates put the figure as high as $50 million.

Botín’s explanation via a press release read thus: “Santander is a retail and commercial bank with significant responsibilities to the societies in which it operates. In making this decision we have had to balance the respect we have for all of our stakeholders – the millions of people, customers and shareholders we serve – with the very significant cost of hiring one Andrea, by compensating for the loss of a significant proportion of seven years of his past remuneration. The Board and I are certain that this decision, although difficult to take, is the right one.”

If Santander wanted him, it should have paid for him 

Warm words, and it will be interesting to see if rumours of either side getting cold feet over the deal emerge in the days and weeks to come.

The impasse revolves around whether Orcel exits UBS as a good or a bad leaver. Bad leavers normally lose their accrued compensation and are recompensated for it by their new employer. Good leavers would usually receive their accrued compensation on departure.

A bad exit typically involves a banker going to a competitor. Is Santander a competitor to UBS? That’s open to interpretation. Both are European-headquartered banks and compete, to a relatively minor degree, primarily in commercial banking.

But UBS’s main focus is in wealth management and the higher ends of investment banking, whereas Santander remains a commercial and retail bank to its core. Santander is also a core investment banking client of UBS, in part due to Orcel’s longstanding relationship with the Spanish bank.

Strategic announcement

A strategic announcement by Santander towards the end of last year may have hardened UBS’s position.

Two months after Orcel’s move came to light, Santander revealed plans for a concerted push in its global wealth management business.

Although Santander’s AUM in wealth management, at around $220 billion, is less than a 10th of UBS’s, and despite a focus on Latin America where the Swiss bank has a chequered recent history, the former’s stated aim of targeting super-rich clients clearly steps on UBS’s toes.

UBS insiders say nothing has changed in its position on Orcel’s departure since it was first announced. This was a senior banker going to another large bank as its CEO and so UBS from the outset made clear it would insist on Orcel serving a full six-months gardening leave and would not pay any deferred compensation.

Roughly 80% of compensation for senior executives at UBS is deferred, typically for five to seven years, and pays out if they retire or leave the banking business. One could argue that Santander’s wealth move confirmed the Swiss bank’s initial stance that it was, indeed, a competitor.

Bigger issues

The good or bad leaver debate opens up bigger issues for the banking industry as a whole.

The financial crisis rightly led to a new era in compensation in which large amounts of bankers’ pay was deferred and subject to clawback. That was, in large part, designed to prevent bankers benefiting from business that paid out at inception, but then lost money over time.

It had the added bonus of putting a stop to the overactive merry-go-round of banking arrivals and departures.

José Antonio Alvarez,

Leading investment bankers contacted by Euromoney say they have never seen anything like the situation that Santander and Orcel find themselves in now. They might see it more often in the future.

Top bankers who have spent several years at one firm will have built up a lot of wealth in the form of deferred comp. It remains the case that bankers that leave one bank are most likely to join another bank.

However, bank chief executives will have to justify to boards and shareholders the full cost not just of the annual pay for big-name hires but also the cost of paying out the deferred wealth accumulated at previous employers.

If banks see all other banks, or indeed other financial service providers, as competitors, then the Orcel compensation saga will be repeated again and again. It could lead to a situation where, when bankers reach a certain length of tenure and a certain seniority, they are de facto locked into that bank.

That would be bad news for an industry that has always benefited from a degree of cross-fertilization of talent and ideas.

Severe embarrassment

What next for Santander? This is undoubtedly a severe embarrassment for Botín, who has rarely put a foot wrong since taking over from her father more than four years ago.

Detractors say her lack of mis-steps has, in part, been down to a fairly conservative strategic approach. The industry was waiting for a big move from Santander.

When it came, the big was a personnel hire. It has quickly backfired. It is mystifying the extent to which Botín and her advisers misjudged the situation, people with knowledge of the situation say.

Could it be that they were not aware of the full extent of Orcel’s deferred compensation, or did they imagine they could win the argument that the two big European banks are not competitors?

José Antonio Alvarez, the current CEO, was to be moved aside to a role as chairman of Santander in Spain. He will now remain as CEO, in the knowledge he was not considered the right person to take the bank forward.

Orcel sees his stellar career in tatters – at least for now. He’s fought long and hard to shed the image of the M&A adviser who made tens of millions from RBS’s takeover of ABN Amro.

No doubt there will be plenty of siren voices that will denounce his greed for not being prepared to give up some of his compensation to fulfil his dream to be CEO of a big European bank.

That would be unfair. Orcel worked hard for seven years to right-size UBS’s investment bank and deserves the rewards that came with it.

If Santander wanted him, it should have paid for him. It should have been prepared to do so in full if UBS was not willing to compromise, or should not have proceeded with the appointment.

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