Thursday, February 05, 2009

Let Us Now Praise UBS, Home of the "Malus"

The Swiss are different from you and me. At least when it comes to their corporate culture.

About a year ago, when UBS reported what then seemed like a huge loss, I marveled that it used the word “devastating” to describe the state of its mortgage operations. It was hard to picture U.S. firms - which at that point were still blaming everything on "headwinds" - using such blunt language.

And UBS has accepted the need to reform its compensation practices, an attitude we all wish we could locate somewhere on Wall Street. So this seems like a good time to remind everyone about the executive compensation plan the bank announced back in November, which really hasn't gotten the publicity it deserves.

The UBS system - how cool is this? - now utilizes “maluses” along with bonuses. As the Times (the British one) explained last fall:

"Just as bonuses (Latin for “good”) are paid out for good performance, maluses (“bad”) will be meted out if the bank subsequently makes losses or if the employee misses performance targets, UBS said. The maluses could wipe out all previously agreed share bonuses and two thirds of all cash bonuses under stringent new rules designed to align the interests of executives and traders with those of shareholders."

A nice piece today by Ingo Walter on praises the malus idea. Walter points out that “in good times, the combination of the rising tide and the use of leverage often makes it impossible to tell good traders from bad ones, with most people generating decent to spectacular returns. It is in bad times that the wheat separates from the chaff. This is precisely why compensation should have a multi-year structure, with bad performances subtracting from the bonus pool in the same way that good performances add to it.”

Maluses, I'm giddily in love with you. I'm sending you Swiss chocolates for Valentine’s Day.

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