November 19th, 2008
04:29 PM GMT
LONDON, England - In the movie Wall Street, Michael Douglas preaches "greed is good." Well, we know what can happen when greed goes amok.
We're living in the aftermath of the worst financial meltdown since the Great Depression. And it's not over yet, there's more pain to come.
A lot of blame is being pointed at CEOs and bankers who helped sink us into this rat hole, and rightfully so. Now in an act of contrition, the fat cats who have made enough money to last a thousand lifetimes, are foregoing bonuses, saying it's the right thing to do.
Who are they kidding? Of course it's the right thing to do, but to call it an act of altruism would be disingenuous.
They are doing it because they know there is plenty of anger at the mess they have gotten us into and it's their way of trying to placate the public and politicians who have their sights on them. They know more oversight is coming, and they are sensitive to the political winds howling at their backs.
What is clear is the investment banking model as we know it is dead and profits will be harder to come by. Bonuses will be smaller in the future if one is still lucky enough to have a job. And most importantly, the criteria for the bonus model is changing.
UBS, one of the banks hardest hit by the credit crisis, is making important changes to how its top management gets paid. The idea is to put more emphasis on long term performance.
"As of 2009, UBS will introduce a new compensation model. Top management may receive variable cash compensation and variable equity compensation in addition to their fixed pay. A large portion of this variable compensation will be held in reserve and paid out only if the results of UBS warrant it. Otherwise, there will be neither variable cash nor equity compensation. This should bring about a cultural shift in the company. Those who are rewarded will be those who deliver good results over several years without assuming unnecessarily high risk."
In explaining why they adopted a new compensation model, UBS stated that they felt the old model was too aligned with short-term results, without consideration for the quality or sustainability of the bank's performance, and that it did not sufficiently take into account the risks assumed.
UBS predicts their bonus plan will be followed by other banks. "I'm convinced this is essential, and the entire financial services industry will have to adjust its compensation models to the new realities," UBS's chairman was quoted as saying.
It's too late to make those responsible for this current financial mess give back their bonuses. But if the UBS model becomes the industry standard, then there might be more sobriety in banks' risk taking in the future. At the same time, shareholders have to be less focused on short-term profits which also added to the casino mentality.
The acid test will come when times get better again. We can hope lessons will have been learned, making bankers more accountable, with bonuses tied to long-term performance not just illusory short-term gains.
Tell me what you think. How should bonuses be determined?
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