Executive pay

The public outrage over excessive bonuses has transformed HR practice at UBS. This is huge. To understand it, watch carefully:

In the last few years, bank and financial executives were paid a lot during the year as salary, and then a lot more at the end of the year as a bonus. The amount of the bonus varied: if you did a good job and created a lot of value for the firm and its stockholders by combining incisive judgment, courage, and caution, it was very large. On the other hand, if you charged around like a drunken sailor making deals that looked good for weeks or months but would cripple the company and maybe sink it, it was instead very large. To understand this, consider the salary as a pier in the bay sitting on the bottom, which doesn’t go up and down with the tide, and the bonus as a boat, actually a really nice yacht, sitting on the pier, which would go up and down with the tide if it were actually floating in the water.

Now UBS, obviously chastened to a fare-thee-well by its criminal behavior, enormous losses, and the complete shredding of its reputation, has put in place a compensation program without those bonuses whose variation from very large all the way to very large had such a salutary incentive effect. After dishing up some haircuts all around, they are now rolled into a salary which varies according to performance, being very large if you do well, and on the other hand very large if you don’t. Your whole salary, not just the bonus, is tied to performance just the way the bonus was. It’s like a pier with a restaurant on it (a nice restaurant, with an excellent wine list), that would go up and down with the tide if it were a boat and floating instead of a pier and not.

Author: Michael O'Hare

Professor of Public Policy at the Goldman School of Public Policy, University of California, Berkeley, Michael O'Hare was raised in New York City and trained at Harvard as an architect and structural engineer. Diverted from an honest career designing buildings by the offer of a job in which he could think about anything he wanted to and spend his time with very smart and curious young people, he fell among economists and such like, and continues to benefit from their generosity with on-the-job social science training. He has followed the process and principles of design into "nonphysical environments" such as production processes in organizations, regulation, and information management and published a variety of research in environmental policy, government policy towards the arts, and management, with special interests in energy, facility siting, information and perceptions in public choice and work environments, and policy design. His current research is focused on transportation biofuels and their effects on global land use, food security, and international trade; regulatory policy in the face of scientific uncertainty; and, after a three-decade hiatus, on NIMBY conflicts afflicting high speed rail right-of-way and nuclear waste disposal sites. He is also a regular writer on pedagogy, especially teaching in professional education, and co-edited the "Curriculum and Case Notes" section of the Journal of Policy Analysis and Management. Between faculty appointments at the MIT Department of Urban Studies and Planning and the John F. Kennedy School of Government at Harvard, he was director of policy analysis at the Massachusetts Executive Office of Environmental Affairs. He has had visiting appointments at Università Bocconi in Milan and the National University of Singapore and teaches regularly in the Goldman School's executive (mid-career) programs. At GSPP, O'Hare has taught a studio course in Program and Policy Design, Arts and Cultural Policy, Public Management, the pedagogy course for graduate student instructors, Quantitative Methods, Environmental Policy, and the introduction to public policy for its undergraduate minor, which he supervises. Generally, he considers himself the school's resident expert in any subject in which there is no such thing as real expertise (a recent project concerned the governance and design of California county fairs), but is secure in the distinction of being the only faculty member with a metal lathe in his basement and a 4×5 Ebony view camera. At the moment, he would rather be making something with his hands than writing this blurb.