Could “phantom equity” be the solution to the problem of how to incentivize people working within financial supermarkets? UBS AG certainly hopes so.
The Swiss group consists of a wealth management unit, an investment bank and an asset management arm. At present, employees receive a large chunk of their remuneration in the form of UBS stock. But that’s a blunt motivational tool.
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If the investment bankers mess up—as they did with their credit bubble bets—that drags down the value of everybody’s shares. Equally, if the private wealth unit gets into trouble, the investment bankers suffer.
So why not give everybody “phantom” equity instead in their respective business units? That way, the rewards of the investment bankers and the wealth managers would be more closely tied to how well their specific businesses performs. It could even be a model for other financial supermarkets. But UBS will have to answer a key question: how to value the phantom shares. The obvious starting point would be to value each chunk by putting its earnings on an appropriate multiple. The snag is that, if you do that today, the value of the wealth management unit and the asset management business adds up to more than UBS’ bombed-out stock market value. In other words, the investment bank would have negative value.
Mind you, the investment bankers themselves wouldn’t mind such a conclusion. If they received very cheap phantom stock, they could be in line for a windfall when markets rebound.
There are ways around this problem—such as applying a uniform discount to all three phantom shares to bring the sum of the parts into line with the market price. But that would underline just how little the market likes UBS’ financial supermarket.
Ultimately, it might be better to break the group up and give employees plain, rather than phantom equity.