Now is the time to make a lot of noise about how awful bonuses are, to soothe shareholders with a promise to make amends for past transgressions, and then to make some symbolic gestures with maximum fanfare.
Such has been the way at RBS in the past and is the current method at UBS. In the week of the Kweku Adoboli trial, when UBS could benefit from a little positive publicity, it’s let slip that it might be capping bonuses.
The Financial Times reports today that the Swiss bank is contemplating a bonus cap in relation to fixed salaries, to profit, or to a peer group.
None of this sounds particularly traumatic. Banks already set bonuses in relation to peers: this is the raison d'être of pay benchmarking companies like McLagan. Capping bonuses in relation to fixed salaries is no real hardship in light of recent years’ fixed salary increases at UBS and elsewhere. Capping bonuses in relation to profit could be painful, but most banks already curtail bonuses in years of low profitability.
The UBS bonus blow is most heavily mitigated, however, by the decision to direct it only to, “executives.” What constitutes an executive has yet to be clarified, but the implication is that – as at Deutsche – it is very senior bankers who will suffer the wrath of any crowd-pleasing compensation modification. Everyone else will (hopefully) be left alone.
Notably, however, UBS has also intimated the appearance of five year deferrals.
This will prove cheering to Anshu Jain, who admitted this week that few of Deutsche’s rivals were imposing five year deferrals but said he was confident that they would – soon. It’s unclear, however, whether UBS is contemplating a punitive five year deferral in which everything vests in the fifth year – like Deutsche – or whether vesting will be staggered throughout the period.
Either way, this looks like a trend. When Macquarie introduced five year bonus deferrals in London a few years ago, the policy proved so unpopular that it was quickly rescinded. When Nomura introduced five year bonus deferrals in April, the pain was expressed as a whimper rather than a shriek. If Deutsche and UBS opt to lock senior people in for five years, others may follow. Sir David Walker, the incoming chairman of Barclays wants a portion of bonuses to be locked up until retirement.
The danger is that punitive pay policies implemented at the top end of investment banks will trickle down to everyone else. More likely, though, seems a series of compensation thresholds above which restrictions become incrementally more punitive - much like a system of progressive taxation. Many banks already pay all bonuses below a specified sum immediately in cash.
For senior bankers, however, the move from three year bonus deferrals to five year deferrals has serious implications for careers. Senior people with five years’ of deferred bonuses will become even more expensive to buyout. For all but the most desirable few, senior jobs in banking will become for life – or for half a decade at the very least.