The public outrage over excessive bonuses has transformed HR practice at UBS. This is huge. To understand it, watch carefully:
In the last few years, bank and financial executives were paid a lot during the year as salary, and then a lot more at the end of the year as a bonus. The amount of the bonus varied: if you did a good job and created a lot of value for the firm and its stockholders by combining incisive judgment, courage, and caution, it was very large. On the other hand, if you charged around like a drunken sailor making deals that looked good for weeks or months but would cripple the company and maybe sink it, it was instead very large. To understand this, consider the salary as a pier in the bay sitting on the bottom, which doesn’t go up and down with the tide, and the bonus as a boat, actually a really nice yacht, sitting on the pier, which would go up and down with the tide if it were actually floating in the water.
Now UBS, obviously chastened to a fare-thee-well by its criminal behavior, enormous losses, and the complete shredding of its reputation, has put in place a compensation program without those bonuses whose variation from very large all the way to very large had such a salutary incentive effect. After dishing up some haircuts all around, they are now rolled into a salary which varies according to performance, being very large if you do well, and on the other hand very large if you don’t. Your whole salary, not just the bonus, is tied to performance just the way the bonus was. It’s like a pier with a restaurant on it (a nice restaurant, with an excellent wine list), that would go up and down with the tide if it were a boat and floating instead of a pier and not.
