What's in Your Malus Envelope?

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Would you be a banker if most of your pay was at risk for three to five years rather than a maximum of one year?

UBS just decided to make itself the test case for overhauling incentive pay. Its new "bonus/malus" system unveiled Nov. 17 holds at least two-thirds of each affected individual's compensation in an escrow account whose balance will be reduced if company-wide or business segment performance takes a tumble in later years. The beleaguered Swiss bank says the change is meant to discourage excessive risk-taking and better align employee incentives with the long-term interests of the corporation and shareholders.

The new paradigm, which begins in 2009, doesn't affect the entire UBS staff. It applies to the 12-member group executive board (except the chairman, who will receive fixed salary only) plus unspecified other senior executives and traders who risk the bank's capital. The Times of London states that the new rules will apply to about 2,000 of the bank's nearly 80,000 employees.

The idea of deferring most bonus amounts and timing the actual payouts to correspond with time periods over which a firm's capital is at risk did not originate with UBS. Rather, both changes were recommended in a lengthy "Best Practices" report issued a few months ago by the Institute for International Finance. That gives added weight to the possibility that other institutions will reformulate their own pay practices along the lines UBS did.

If the entire industry followed UBS's lead, would you be more inclined to consider other career options outside of finance?

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