UBS takes off the cap

Posted by Marc Hodak on November 19, 2008 under Self-promotion | Be the First to Comment

UBS is trying some new incentive plan structures.  It is adopting most of the elements that our research has shown works for public companies.

One of those elements is a potentially uncapped reward. Incentive compensation has many moving parts, so it might seem counter-intuitive that a capped bonus potential actually undermines accountability to shareholders, but it’s true–both in theory and in empirical research. The article notes that the uncapped bonus aspect of the proposed plan is a sticking point for “shareholder advocacy group” Ethos. The article ends with:

“UBS does not intend to limit the variable part of the remuneration, by capping for example the bonus in terms of base salary or by setting a maximum amount of shares to be awarded under the long term incentive plan,” Ethos said.

“Consequently Ethos has concerns that the new system will not prevent UBS from paying, in the future, remunerations that could be deemed excessive.”

Ethos’s concerns are unfounded. If they understood how all the elements of the plan work together, and see how it actually works with some of our past clients, then they would see how this aspect of the plan is actually critical to preventing excessive remuneration.

Alas, we can attest that very few “shareholder advocates” or institutional shareholders or any other outsiders who have not been apprised of the plans as the board has, can really, fully comprehend them, especially if the plans involve any innovations. Yet these are the people to whom we want to give a “Say on Pay.”