For years we were told that Wall Street had to pay its top executives sky-high bonuses in order to retain the best talent. I guess when your industry is imploding, folks are willing to stick around for a little less money.
Goldman Sachs is getting a lot of cred for announcing on Sunday that its seven top officers won’t get bonuses this year. New York’s attorney general is pressuring Citigroup to do the same, saying it would be bad form for executives to take home big paychecks as the company gets rid of tens of thousands of employees. It was actually Deutsche Bank, though, that started the recent trend, in October, cutting bonuses for its four-member executive board.
All of that makes for nice headlines, but going forward I think the real company to watch will be UBS. The Swiss banking giant made its no-bonus announcement today, but then went a whole lot further, laying out a new “bonus-malus” system for 2009 and beyond, which is meant to “bring about a cultural shift in the company.” It’s not just about cutting bonuses for 2008. It’s about building a better mechanism for aligning executives’ interests with the long-term health of the firm, including the avoidance of “unnecessarily high risk.”
Here’s how it works:
A maximum of one-third of the annual variable cash compensation will be paid out. The larger part of it will be held in an escrow account and kept at risk for future performance. For example, should UBS achieve a loss in a subsequent year, no bonus will be awarded, and the cash balance will be reduced by a malus.
A similar concept applies to the variable equity compensation. It is also based on UBS achieving positive results over several years. Variable equity compensation in the form of shares is provisionally awarded. The shares only vest after three years, provided pre-defined performance criteria are met. Furthermore, executives are obliged to hold 75% of their vested shares (after paying taxes) for several more years. If UBS’ performance in the three-year measurement period does not meet the set criteria, the number of provisionally awarded shares is reduced in part or in whole.
In other words, however executives make money, it better be worth more than a short-term pop.
The other really notable piece of the UBS plan is that it will affect more than just the top few officers:
The underlying philosophy and the elements of the new model for the [executive board] will also be employed for the senior executives and key people of the business divisions. Furthermore, the [variable cash compensation plan] will be implemented for personnel in executive positions and key functions, for example, employees responsible for using risk capital and assuming significant financial risks. The group of people affected will be defined presently.
It will be really interesting to see who all that includes. Bonuses cut in 2008 can easily be put back into place in 2009, but what UBS is doing—well, it’s the best shot I’ve seen yet at creating pay-for-performance with lasting power.
Barbara!