Paying a forfeit
Andrea Orcel’s signing-on package shows the scale of the pay pickle facing banks. UBS stumped up $26 million to prise its investment-bank head from Bank of America Merrill Lynch last year, making a mockery of so-called retention packages designed to stop employees jumping ship. True, Orcel received no new cash or shares for joining his Swiss rival: the award simply replaces three years’ worth of pay he forfeited for leaving BAML. And the award can still be clawed back. But it shows how aggressive behaviour by just one bank can reinforce the industry’s pay problem.
The public relations impact is terrible: here is an accident-prone bank paying up to entice an outside executive who advised on the doomed carve-up of ABN Amro. Just a few months earlier, UBS had suffered a $2.3 billion rogue-trading loss. Later in 2012, Libor settlements whacked the bank for a further $1.5 billion in fines.
But UBS’s action also shows the pointlessness of mammoth retention awards. BAML’s retainer simply didn’t work. As long as there is always one bank out there willing to bid high, existing pay structures will be hard to change.
UBS has come up with some interesting and welcome ways to reform pay. Executives will from now on be entitled to a bonus pool worth a maximum 2.5 percent of adjusted pre-tax profit. Employees will be paid in contingent capital, aligning stakeholder interests. And average deferral periods for bonuses are rising significantly for top earners.
Still, UBS is also trying to rebuild its franchise – and with a relatively strong capital position it doubtless feels it can and indeed should pay what it takes to stay in the game. It has already unveiled a big shrinkage plan. UBS needs to excel in the investment banking businesses it is keeping.
Swiss citizens have granted shareholders binding votes on pay. The European Union is restricting variable pay to a maximum of two-and-a-half times base salaries. Banks are slowly reducing compensation to revenue ratios. But the trend towards longer deferral periods means paying people to move firms will be more expensive. Orcel-style buyouts will persist.