UBS investment bankers yesterday learned that their bonus pool would be down by 60%, and that anyone inclined to grumble to division head Carsten Kengeter should be aware that (1) he would have none of it and (2) he himself was taking a bonus of zero, so see point (1). Rank-and-file bankers were perhaps a mite peeved, but they learned today that they have nothing to complain about compared to their formerly better-compensated elders, for whom "down 60%" or "zero bonus" would be an absolute joy when the reality is more like this:
Last February, UBS awarded share-based bonuses that were due to vest in three stages in 2012, 2013 and 2014. However, under UBS compensation rules established in 2010, if a division posts an operating loss, the board can rescind between 10% and 50% of shares awarded to employees who earn share-based bonuses worth at least two million francs or $2 million.
UBS's pay rules say that employees whose "total bonus exceeds CHF/USD 2 million will only vest in full if the business division to which the employee belongs is profitable." On Tuesday, UBS disclosed the 2011 loss in its investment bank. In light of the loss, the board decided several weeks ago to use the maximum clawback power at its disposal under rules aimed at aligning compensation with long-term performance, the bank said. In opting for the maximum forfeiture, the board took a particularly tough line on who would share the pain of the trading losses. The bank informed employees of its decision Tuesday, according to a person familiar with the situation.
Bankers will now receive half of the shares due this year, which vest on March 1.
Losing 1/2 of 1/3 of the share-based portion of your previous year's compensation is harsh (is it?), but it's called for by UBS's compensation policy:
[T]he vesting of equity awards to certain categories of employees is subject to the fulfilment of specific performance conditions. This group comprises key risk-takers and controllers, around 200 individuals who can materially commit or control the bank’s resources and / or exert significant influence over its risk profile. Group Managing Directors and employees with total annual bonuses exceeding CHF / USD 2 million are also subject to this requirement. Deferred awards granted to employees in these categories will only vest in full if the employee’s business division is profitable.
And since UBS's investment bank lost oceans of money in 2011, the board went with maximum clawback. Which makes sense - you should feel some pain if you're a senior manager and you're losing money for shareholders. In an age where banks are increasingly imposing clawbacks not only on traders who actually lose money and/or do illegal things, but also on their managers, UBS's policy of collective blame takes it one step further to make sure that no one is rewarded if the shareholders lose. And in a world where nobody believes that clawbacks have, um, claws, seeing one enforced broadly* sends a strong message to Wall Street, or Bahnhoffstrasse anyway, that losing money has consequences.
And that's all there is to say about that.
Except ... I hesitate to call your attention to this because it's so trivial but just a teensy little footnote:
There's something funny about that number. Specifically the absence of parentheses around it. UBS's investment bank was profitable in 2011. All those bankers with their negative bonuses got robbed. They should sue.
They won't win though because I left out one footnote to that footnote:
See UBS's investment bank wasn't profitable in the sense that it "made" "money." Just in the sense that it profited on its own credit widening by 80ish basis points over the course of 2011, i.e. from "debit valuation adjustment" gains. Some people think that booking a profit from your own credit deterioration is kind of bullshit, though I have argued half-seriously in the past that it is a "real" form of profit in some senses, and it is in any case the IFRS-sanctioned number that shows up on, say, Bloomberg. So if you were a UBS investment banker you could say "our division was profitable in 2011" and not be lying, provided that you then walked away quickly and didn't answer any questions.
All I can find on the UBS comp policy is that summary excerpted above, so I don't know if it's drafted to exclude DVA gains - though obviously that's how the board interpreted it. I assume they're right. But you could imagine the thought process of a UBS trading manager who was not clear on the details. "Hmm, I see Kweku has left us in the red for the year. Perhaps we could do some additional foolish things to drive up our CDS spreads and try to make it back on DVA."
* Assuming for the sake of argument that lots of people at UBS make at least $2mm a year these days.