UBS Bonus Plan Gives Bankers Incentives To Take Less Risk

Outside UBS

UBS’s plan to pay part of top employees’ bonuses in bonds that can be wiped out will give traders and bankers an unfamiliar incentive: limit risk.

UBS will compensate some workers with contingent capital bonds, which can be written off if the bank’s common equity ratio falls below 7% or the company needs a bailout, the Zurich-based firm said Tuesday.

Bloomberg reports that the shift satisfies calls by regulators for debt-based pay and helps UBS meet stricter capital requirements, while risking defections among top performers. It may also go beyond pay changes at other companies in tying employees’ rewards to the bank’s safety as UBS exits some businesses and tries to move beyond recent trading losses and low returns.

'It’s hard for people to step out of their worlds and think macro about these institutions', said Sallie Krawcheck, a former Bank of America executive who called for bankers to be paid with debt in a Harvard Business Review article last year. 'While a trader, an investment banker or a financial adviser might not think about UBS’s leverage ratio, they will think about the message they get from this about the risk tolerance of the company'.

About $551m of bonuses will be paid in contingent capital bonds, which vest after five years. The securities will account for 40% of bonuses for executive board members and 30% for all other employees with total compensation of more than $250,000.

Hit the link below to access the complete Bloomberg article:

UBS Bonus Plan Gives Bankers Incentives To Take Less Risk

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