Published February 04, 2014
A jump in bonus payments at Swiss bank UBS AG stoked criticism on Tuesday that a previous cut was short-lived and banks have not learned lessons from the financial crisis.
Banker bonuses drew intense criticism after the crisis which peaked in 2008 and 2009 for creating lucrative short-term incentives, tied to often ill-conceived products, whose failure cost banks and governments billions while leaving the bankers themselves unscathed.
Yet as conditions in the banking sector improve, UBS and other banks argue they need to keep rewarding top performing staff in areas such as merger and acquisition advisory, bond trading or advising rich clients, or risk losing them to rivals.
UBS said it had increased its bonus pool for 2013 by 28 percent to 3.2 billion Swiss francs ($3.5 billion), after a cut in 2012 when it was fined for rigging Libor interest rates.
It said it needed to reduce a pay gap between with other banks and said the increase was justified after a "transformational" year in which it swung to higher than expected net profit and surpassed most of its turnaround targets.
Critics said it showed little had changed after the financial crisis and argued banks were still paying staff too much, often at the expense of shareholders.
"It is offensive when bonuses outpace profits. It isn't really comprehensible," said Roby Tschopp, head of activist shareholder group Actares.
Actares voted against UBS's pay plan last year and Tschopp said he didn't know how he will vote this year.
Thomas Zimmermann, spokesman for Schweizerischer Gewerkschaftsbund, an umbrella organization for Swiss labour unions, said: "UBS is carrying on as if nothing happened.
"They have learned nothing from the public debate about the Minder initiative or the 1:12 initiative," Zimmermann said, referring to controls on executive pay introduced in Switzerland last year.
The Minder initiative gives shareholders a binding vote on compensation, though voters rejected a proposal to limit executive pay to 12 times that of junior staff.
UBS's decision comes with the bonus season in full swing in Europe and follows payouts already announced at major U.S. banks. Bonuses in investment banking are expected to be mostly flat to slightly lower, though some firms are raising pay.
Bank of America and Morgan Stanley increased average pay last year by around 7 percent, while pay in the investment bank arms of JPMorgan and Deutsche Bank fell.
Goldman Sachs cut average pay by 4 percent last year, although average compensation still topped $380,000 for its 32,900 staff.
Top staff continue to receive multi-million-dollar awards, but more cuts could be on the cards for weak and average performers, especially in fixed income after a relatively bad year in that sector, bank and recruitment industry sources said.
UBS's bonus hike would lift average personnel costs to 249,581 Swiss francs ($276,500) across the bank's 60,200 staff, up 3 percent from the year before. Chief Executive Sergio Ermotti said the bank had cut its absolute and relative pay substantially in recent years and the rise for 2013 had "reduced gaps to market pay".
"We feel comfortable that we now have a normalised compensation framework for the entire bank that allows us to be competitive and attract and retain the best talents," Ermotti told reporters on a conference call.
UBS is considering introducing an "allowance" system to help comply with European Union rules that will cap 2014 bonuses at 100 percent of fixed pay, or double with shareholder approval, for his 5,600 staff in London and others in the EU.
"There are various options and it goes without saying one of those is to use allowances that are supplementary, and can be included in the fixed compensation framework," Ermotti said.
He said UBS would decide in the next couple of months the best way to comply with the EU directive.
Rivals including Barclays, Goldman Sachs, HSBC , Bank of America and JPMorgan are also expected to introduce monthly or quarterly role-based allowances that count as fixed pay but have more flexibility than salaries and are not pensionable.
UBS changed its compensation framework in 2012, which it said was to increase focus on long-term performance and was aligned with creating attractive returns to shareholders.
It said the cost of performance awards in 2013 would be flat for shareholders at 3 billion francs on an accounting basis after amortisations and deferrals.
Yet critics of rich banker awards seem unlikely to be appeased by such reassurances. "It sends the wrong signal," said Zimmermann. "This isn't how banks should do business."