Swiss banking giant UBS has announced a new system for awarding bonuses to executives and board members. Although the system does not apply to traders and mid-level bankers, it’s still a useful document. The future iteration of Wall Street is going to rethink its entire bonus structure, including for traders and bankers. The rough blueprint UBS provides, if it and other banks apply something like it more broadly to other employees in the future, could have fiscal implications for New York.

UBS says that in general, it wants future bonuses at the company to be tied to “clear performance criteria … linked to risk-adjusted value creation” over a measurement period that’s longer than the one-year performance period upon which Wall Street has usually awarded its bonuses.

To that end, at the executive and board level, future bonuses at UBS will have two parts: “variable cash compensation” and “variable equity compensation.” UBS will pay out only one-third of the annual cash bonus part for any given year. The rest will be held in escrow, with the next year’s payout of that first year’s bonus to be based partly on that second year’s performance, as well. The bank will be able to claw the money back from the earlier year in the case of poor results, excessive risk-taking, or individual and team performance shortfalls, not just for the first year, but, again, for the second year as well.

Over time, managers and board members would accumulate a permanent cash balance in this escrow account, with the company paying out only 33 percent of that cash balance in any given year. (Managers will have to keep their stock-based compensation for at least three years, as well, before having the right to sell them for cash.)

It seems fair to wonder if New York City and State could tax the entire value of an employee’s annual cash bonus if two-thirds of that cash bonus were held back from the executive by the awarding firm. After all, the bonus still carries a liability for the employee; thus, it is not fully earned income.

If it turned out that New York could tax the value of the bonus only when it was fully dispersed with no remaining liability to the employee beyond lawsuits for fraud, etc. — that is, after the lock-up period had expired — such lags in bonus taxation would reduce income volatility, and thus income-tax volatility, in the city and state.

Consider: in such a case, firms would continue to pay out bonuses in a peak boom year for the two years after the boom year, and the state and city thus would continue to tax those boom-level bonuses during those post-boom years, assuming the firms didn’t claw back the bulk of the prior-year, boom-year bonuses due to employee mistakes or malfeasance. Similarly, bonus payouts and tax collections in the boom years following a bust would be smaller, to account for small cash balances left over from the bust years.

It’s become obvious in the past year or so that the era of huge bonuses on Wall Street may be over for a very long time, not measured in years, but maybe in half-decades or forever-afters. But huge changes in the bonus structure itself could mean that New York has to get used to a different way of taxing these smaller, longer-term bonuses.

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