As bonus time looms, the financial services industry around the world faces an unprecedented situation of government financial participation and intense political scrutiny. Both 2008 compensation and the pay paradigm for future years are being reshaped under this spotlight. This White Paper focuses on public relations aspects of the dilemma confronting U.S. investment banks over reformulating compensation – both near-term and long-term, from the C-suite to the operations staff. Due to recent and ongoing injections of taxpayer funds, decisions that traditionally aimed to balance employee retention needs with budgetary constraints must now also weigh the interests of a daunting array of stakeholders, including Congress, the U.S. Treasury, the news media, and the taxpaying public. Meanwhile, rivals both traditional (other bank holding companies) and non-traditional (boutique and mid-market investment banks and alternative investment firms) are waiting in the wings, eyeing opportunities to poach star contributors.
Broad reforms in compensation models are in store for 2009 and beyond. The direction of change is suggested by UBS's newly announced pay paradigm for its senior ranks, which follows recommendations issued earlier this year by a group of global bank leaders and regulators. The new paradigm aims to discourage excessive risk-taking and better align employee incentives with shareholder interests. THE CHALLENGE
During the second half of 2008, the financial and legal landscape of American investment banking underwent changes that threaten to obsolete the industry's traditional compensation model, in which most of employees' cash compensation was determined and paid close to year-end. The major transformative influences are: 1. Government capital injections into a range of financial institutions under the banner of the Emergency Economic Stabilization Act (EESA) and its Troubled Asset Relief Program (TARP). 2. The disappearance of several former first-tier banks through forced mergers or bankruptcies. 3. Conversion of the remaining standalone investment banks into regulated bank holding companies. The staggering size of the bank rescue legislation enacted in early October ($700 billion) and the Treasury Department’s deployment of a substantial portion of it via capital purchases, stirred up a groundswell of fury against financial institutions in general and recipients of EESA aid in particular. Voter outrage quickly flowed through to Congress, where key committee chairs have demanded all institutions receiving bailout funds provide detailed accounting of how this year's bonus pools are determined and allocated, and certify that taxpayer funds will not be used to augment bonus pools. Some highly-placed elected officials have gone further, publicly urging banks to refrain from paying any bonuses for this year.(1) On Nov. 12, the four major U.S. banking regulatory bodies issued a rare joint statement (2) that included an order for banks to "regularly review their management compensation policies to ensure they are consistent with the longer-run objectives of the organization and sound lending and risk management practices." While incentive pay for corporate-level officers (whose individual compensation amounts are disclosed in public filings) is most vulnerable to this onslaught, it's important to note that many critics are urging a clampdown on year-end cash payouts for all levels of employees (3, 4). In this hothouse environment, many firms are holding bonus decisions in abeyance, and the outcome is shaping up as a game of chicken. An important break came on Nov. 17, when Goldman Sachs and UBS revealed their respective top executives would take no bonuses for 2008. UBS also unveiled a new incentive structure for future years, which will apply to its group executive board, the executives one step below, and all other employees who exercise "key functions," such as "using risk...