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Will cutting bonuses at UBS work?

Troubled Swiss bank reveals it may cut bonuses after all, but will it help or hinder it in the long term?

Giving sizeable bonuses to bankers in today’s world is usually met with outcry from within the sector, especially when banks are being bailed out by their domestic governments as well as by wider authorities, after loss after loss in earnings results.

Trading conditions are still volatile, financial regulatory reforms will cost billions to implement worldwide and capital requirements for banks are rising – so why are banks still paying bonuses?

According to the FT, newly appointed CEO of UBS Sergio Ermottirevealed that the bonus pool could be cut, after the bank initially opted to set aside 90% of the investment bank’s SFr1.35 billion of third-quarter revenues. 

Keeping the bonus pool in tact was not exactly a popular choice after losing $2.3 billion in a rogue trading scandal, axing thousands of staff and paring down its investment banking unit.

But as Euromoney detailed in this month’s issue, best practice on pay is ignored around the industry and not just at UBS

Investment banks are practically required to pay out the very kind of guaranteed bonuses the Financial Stability Board condemns if they wish to attract new staff, according to an Institute of International Finance report released last month.

The survey, conducted by Oliver Wyman and rather optimistically entitled Compensation Reform in Wholesale Banking 2011: Assessing Three Years of Progress, shows that while multi-year guaranteed bonuses are in decline, in 2010 single-year guarantees to new hires made up 8.5% of the bonus pool – a 3% increase from 2009.

After the last round of earnings, many banks announced a cull in staff, including UBS’s rival Credit Suisse and ING, and with it some of the bonus pool. While a slash in headcount and bonuses seems like a sure-fire way to shore up banks' balance sheets, many market participants have emphasised that this will in fact hurt banks profits. For example, in August, Gemma Godfrey, Credo Capital’s investment committee chairman, told Euromoney

“Most banks have previously cut jobs to stem losses or for consolidation, but not this time. High capital requirements are now making banks more stable but less profitable, while regulation is making banks less flexible. While net profits are substantially down from before, headcount eats into the bottom line.”

While UBS might be looking at paring down its bonus pool, this will not amount to much unless the bank sticks with its strategy of being a “less capital-intensive investment bank” and seriously addresses its risk management issues

- Euromoney Skew Blog

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