Swiss bank UBS has decided to "claw back" 300 million Swiss francs ($282 million) of its deferred bonus compensation promised to top executives in order to cover a portion of its 2.74 billion-franc loss, Bloomberg reports. While it's been largely suggested that banks should institute such policies for bonus compensation, many have been apprehensive to do so. It's interesting to see a bank really employ the tactic. While this should give us some hope that bankers are getting it, the CEO's attitude towards claw backs and the bank's other actions indicate otherwise.
First, clawing back some compensation here makes total and complete sense. The firm posted an enormous loss. It had set aside some compensation to pad such losses, in case past bets that derived a profit led to future losses. As a result, it took some of that deferred compensation back, to cover a loss that resulted after the pay was set aside. That's exactly how things should work. Bonus compensation should take into account long-term performance.
Yet, this comment by UBS CEO Oswald Gruebel is very disappointing:
"Bank salaries and bonuses are politically influenced and have become a controversial public topic as never before," Gruebel said. "That's why we raised the proportion of deferred share-based variable compensation for higher-paid colleagues. These decisions make possible equitable compensation as well as the coupling of bonuses to the long-term success of our firm."
No. No. No. You shouldn't be instituting these policies because of political pressure or public anger. You should be doing it because it makes sense. And it does. If long-term performance could be negatively affected by short-term gain, then you need a mechanism in place to prevent that. Claw backs are your check on that risk. He kind of says that at the end of the statement, but it's pretty clear from what he says first that long-term success wasn't the chief motivating factor for why this policy is in place.
And what's worse? Despite that 2.7 billion-franc loss, take a guess how much in cash bonuses UBS paid out in 2009:
UBS is paying out 2.9 billion francs in cash bonuses for 2009, 34 percent more than the previous year.
As a matter of fact, UBS's loss this year was far less than last year's. But it was still a loss. And if you look at some simple math, you quickly find that without these cash bonuses, UBS would have made shareholders a profit, instead of a big, ugly, loss.
I know most bankers would argue that bonuses are misconstrued by the media, because they're a major portion of compensation. I understand that much better than the average journalist, since I worked as a banker myself. But I also never took my bonus for granted. After my first year, it was never guaranteed. So I spent responsibly, assuming it could be as low as zero.
If bankers don't have this attitude, then they might as well throw away the bonus concept altogether and just move to a pure salary system. If a bonus is always essentially guaranteed to be at a certain level no matter the firm's performance, then why bother even calling it a bonus?