UBS to cap salaries at $750000

http://online.wsj.com/article/SB11946641745628892…

A Salary Cap For Bankers: $750,000 Max By ANITA RAGHAVAN and DANA CIMILLUCA November 10, 2007; Page B1

NEW YORK -- There won't be any million-dollar babies among bankers and traders at the securities arm of UBS AG this year.

The Swiss financial giant has told investment bankers and traders on Wall Street and elsewhere that their 2007 cash pay will be capped at $750,000, with a much greater portion of their total compensation coming from stock than in other years. Previously, there was no limit on the cash amount they could get paid.

The move is among the first signs of a clampdown on pay in the financial world amid the credit crunch. The crunch's impact has spread in recent weeks, resulting in more than $40 billion in write-downs tied to mortgage securities.

Among the hardest hit: UBS, which last month said it will write down four billion Swiss francs ($3.55 billion); Citigroup Inc., which expects fourth-quarter write-downs of as much as $11 billion after a third-quarter write-down of $3.55 billion; Merrill Lynch & Co., which wrote down $7.9 billion; and Morgan Stanley, which has taken a $3.7 billion hit.

All that has led to an increased push by financial firms to cap expenses. Compensation costs are an obvious target: They total roughly 56% of financial firms' total revenue.

Securities firms and banks "are trying to save as much cash as they can," says Gary Goldstein, president of Whitney Group, an executive-search firm. "It's a sign of the environment we are in," he says, adding: "I wouldn't be surprised if others follow."

A spokeswoman for UBS says, "As we previously announced, a greater portion of compensation this year will be paid out in stock."

The move comes amid the most difficult year in pay in the financial world since 2002. Overall pay on Wall Street will be flat this year, according to Johnson Associates, a New York compensation-consulting firm. Meanwhile, financial firms "will look much more carefully at performance" in determining pay, says Mark Mansell, a partner at London law firm Allen & Overy.

One point of paying employees with greater amounts of stock is to give them an incentive to stay at the firm. That's because the stock typically vests over several years and employees forfeit the shares if they leave beforehand.

But some executive recruiters say the UBS move could hurt morale at the firm. "I've been in the business since 1978 and have never seen a firmwide cap on cash compensation that low," Mr. Goldstein says. Some bankers and traders get pay packages totaling $5 million or more, meaning that stock will account for nearly all of the pay they will receive.

Many workers outside the financial world would celebrate receiving annual cash pay of $750,000. But in the high-rolling world of Wall Street, the cap on cash is likely to rile bankers and traders, long used to multimillion-dollar pay packages.

"If you are getting $750,000 in cash, you are only getting $350,000 after taxes if you are in the top tax bracket," says Michael Karp, chief executive at Options Group, an executive-search firm based in New York.

Financial firms often tinker with pay amid market slumps. Former Merrill President Herbert M. Allison Jr. was well known on Wall Street in the 1990s for developing complicated pay mechanisms featuring stock awards. The share grants -- derided as "Herbies" -- were put in place amid a round of cost cutting and layoffs at the firm. (The move helped Merrill retain senior employees; the Herbies soared in value when Merrill's stock later surged in the bull market.)

To soften the blow at UBS, bankers and traders will receive two kinds of stock. One kind will vest over three years; the other, a new "special'' stock, will vest within a year. Any pay UBS traders or bankers receive over $2 million will be entirely in the special stock.

I'm actually surprised by this. Hopefully other firms won't follow.