In theory, we are in bonus season. But it’s looking more like clawback season as banks give bonuses more in line with performance. A case in point is UBS, which for the first time in its history is taking back part of the bonuses slated for its investment bankers, according to a report in the Wall Street Journal.
UBS is not alone. Other firms such as Deutsche Bank, Morgan Stanley and Goldman Sachs are also setting limits or have clawback provisions taking effect now after being inspired by the Great Recession, according to the WSJ. The slowdown in the investment banking business has also taken its toll on bonuses and will likely lead to more front-office layoffs across the industry.
To recap, UBS’s board voted to take back 50% of share-based bonuses awarded last year to investment bankers who were looking forward to payoffs of more than $2 million, according to the WSJ. The main reason for such a stunning clawback was the bank’s trading scandal in November that had a $2.3 billion price tag and caused a 2011 loss of $1.32 billion. In addition, earlier in the week, UBS shrunk the bonus pool for investment bankers by 60%, also because of the scandal. The bank’s compensation rules specify that if a division posts an operating loss, the bank’s board can hold back on 10% to 50% of shares in share-based bonuses. The bank board also looked ahead to retaining talented staff and set aside 300 million francs to hold on to valuable employees and those in businesses that the bank wants to expand.
Considering the year it has had, UBS is making all the right moves, including a revamp of its investment banking business. Other banks have not been as prudent.
To jog your memory, in the years immediately after the Great Recession officially ended, rock star banker bonuses shot up to their pre-crisis, exorbitant levels. Much of the reasoning for those windfalls was that many bankers went without their millions during the darkest days of the recession. However, this was cold comfort to those millions left stranded by a recession the bankers created. The banks appeared to be tone deaf to the public relations implications of handing out large sums of money while so many others were in dire straits. The outrage that followed, however, may die away as we see that the return to huge bonuses may turn out to be an aberration.
As banks move to a more rational approach for bonuses, I have a suggestion. Why not shift some of the bonus money to improving frequently neglected (and sometimes manual) middle and back office systems? And, while you’re at it, why not maximize your middle and back office capabilities by hiring more talent there so that massive mistakes and outright financial crimes can be detected early on before they bring down the firm? By the time these fiascos get the attention of the CEO, it’s usually too late. As we’ve seen, blissfully ignoring the Forbidden Cities of the middle and back offices is frequently fatal.
The spotlight is rarely aimed at operational and financial risk personnel, reconciliation managers, operations staff and others outside of the front office. Yet it’s often their efforts behind the scenes that make it possible for the front office rock stars to shine or at least not go down in flames.
Maybe it’s time to reward these unsung heroes too?
Need a Reprint?
Leave a Reply