Posts filed under “Wages & Income”

UBS $37B Write Down, Part II: Compensation

Buried at the end of the report discussed earlier is the specific criticism of the financial compensation system in place at UBS for traders and the engineers of structured products.

The bigger question is how little their quaint little system differs from any other large bank or brokerage firm on Wall Street. Remind me to ask Johns Thain & Mack about that.


6.3.8 Compensation

UBS has identified the following contributory factors related to compensation and incentives:

Structural incentives to implement carry trades: The UBS compensation and incentivisation structure did not effectively differentiate between the creation of alpha (i.e., return in excess of a defined expectation) versus the creation of return based on a low cost of funding.

Asymmetric risk / reward compensation: The compensation structure generally made little recognition of risk issues or adjustment for risk / other qualitative indicators (e.g. for Group Internal Audit ratings, operational risk indicators, compliance issues, etc.). For example, there were incentives for the CDO structuring desk to pursue concentrations in Mezzanine CDOs, which had a significantly higher fee structure (approximately 125-150 bp) than High-Grade CDOs (approximately 30-50 bp).

Insufficient incentives to protect the UBS franchise long-term: Under UBS’ principles for compensation, deferred equity forms a component of compensation that generally increases with seniority. Essentially, bonuses were measured against gross revenue after
personnel costs, with no formal account taken of the quality or
sustainability of those earnings


Gee, with that compensation structure in place, how could anything possibly go awry . . . ?


Report on UBS’ $37 Billion Writedown

Bankers’ pay is deeply flawed
Raghuram Rajan
FT, January 8 2008 18:04

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