UBS Cuts 2011 Bonus Pool 40% as Investment Bank Posts Loss

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UBS Reduces 2011 Bonus Pool 40%
UBS is shrinking its investment bank as stricter capital requirements and the European sovereign debt crisis hurt profitability. Photographer: Simon Dawson/Bloomberg

UBS AG, Switzerland’s biggest lender, cut its 2011 bonus pool by 40 percent and investment bank chief Carsten Kengeter waived any variable pay entitlement as his division posted a second consecutive quarterly loss.

The bonus pool, including pay deferred into future years, fell to 2.57 billion Swiss francs ($2.8 billion), from 4.25 billion francs in 2010, the Zurich-based bank said today. The pool at UBS’s investment bank is down 60 percent.

“I don’t see how compensation should stay the same or go up if profitability of the banking industry is going south,” Chief Executive Officer Sergio Ermotti told reporters in Zurich today. “We’re trying to strive for a situation in which both the shareholder and employee can have a win-win situation.”

While many of the world’s largest lenders, including Deutsche Bank AG and JPMorgan Chase & Co., are curbing pay as they grapple with shrinking revenue, UBS’s cuts are among the deepest. The dwindling bonus pool, down from 4.8 billion francs awarded in 2009 when UBS reported a 2.74 billion-franc loss, means the bank risks losing staff, said Matthew Czepliewicz, an analyst at Collins Stewart Hawkpoint Plc in London.

“UBS is a bit ahead of the industry on reducing pay,” said Czepliewicz. “They don’t have much choice given how high compensation was as a proportion of revenue.”

Share-Based Awards

UBS plans to supplement lower bonuses with about 300 million francs in special-plan awards to key employees of the investment bank in 2012, Chief Financial Officer Tom Naratil said. These share-based awards will vest after three years and will include stricter forfeiture clauses than existing stock-based compensation, he said.

Deutsche Bank, Germany’s biggest bank, said last week it shrank its 2011 bonus pool by 17 percent, while deferring a larger portion of the awards into future years. Lazard Ltd., the largest independent merger adviser, said yesterday it cut discretionary bonuses for 2011 by about 20 percent. Credit Suisse Group AG, the second-biggest Swiss bank, plans to pay part of bonuses to senior employees in bonds made from derivatives.

UBS is shrinking its investment bank as stricter capital requirements and the European sovereign debt crisis hurt profitability. The company plans to cut risk-weighted assets at the division by almost half under the Basel III rules, and reduce the number of employees to about 16,000 from 17,256 at the end of December.

Fourth-Quarter Loss

The securities unit reported a fourth-quarter pretax loss of 256 million francs earlier today, after a loss of 650 million francs in the third quarter when it lost $2.3 billion because of unauthorized trading. UBS’s net income fell 44% to 4.23 billion francs in 2011, after fourth-quarter profit declined to 393 million francs from 1.66 billion francs in the year-earlier period.

Kengeter volunteered to waive any variable compensation the bank’s board might have awarded him following the discovery of the trading loss in September, Ermotti told reporters today.

Kengeter’s base salary was just 874,626 francs out of total compensation of 9.32 million francs in 2010, according to a report on UBS’s website. The balance included bonuses and deferred cash payments. The bank usually decides on variable bonuses in January.

Ermotti declined to say what he plans to do about his own compensation.

About 707 million francs of UBS’s 2011 bonus pool will be deferred into future years.

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