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UBS Cuts Bonus Pool 7%, Includes Bonds That Can Be Wiped Out

A sign sits on a security fence during construction work outside UBS AG's offices in Geneva. Photographer: Valentin Flauraud/Bloomberg
A sign sits on a security fence during construction work outside UBS AG's offices in Geneva. Photographer: Valentin Flauraud/Bloomberg

Feb. 5 (Bloomberg) -- UBS AG, Switzerland’s biggest bank, cut its 2012 bonus pool by 7 percent after reporting a loss for the fourth quarter and the year on reorganization charges and a fine for trying to rig global interest rates.

The bonus pool, including pay deferred into future years, amounts to 2.5 billion Swiss francs ($2.75 billion), down from 2.7 billion francs for 2011, the Zurich-based bank said today. About 500 million francs of bonuses will be paid in contingent capital bonds, which will be written off if the common equity ratio falls below 7 percent or UBS needs a bailout.

UBS and Credit Suisse Group AG, the country’s biggest banks, can use contingent capital instruments to boost their capital ratios under Swiss rules. UBS said it could increase capital by about 1 percentage point through awarding bonuses in contingent notes over the next five years. Barclays Plc awarded part of its 2010 bonus pool under a “contingent capital plan” whereby bonuses were deferred over three years and were only to be paid out if the group’s core tier 1 ratio, a measure of financial strength, is at least 7 percent.

UBS said the contingent capital notes broadly replicate the features of bonds that were sold to investors in 2012, with the key difference being that employees’ bonds would be written off at a 7 percent capital trigger, while for other bonds that level was set at 5 percent.

Prudent Risk-Taking

“It thus incentivizes prudent risk-taking by employees,” UBS said in a statement. “We are confident that our compensation decisions for 2012 are in the best interests of the firm and its future. They will help reinforce a culture of accountability, create the incentives necessary to execute our strategy, and deliver attractive returns to our shareholders.”

Almost 37 percent of shareholders voted against the bank’s compensation report for 2011 at the annual meeting in Zurich on May 3. Chairman Axel Weber pledged at the time to “very seriously” consider compensation issues. The bank had in-depth discussions with its biggest shareholders to better understand their views on pay, UBS said today.

Employees will receive annual interest payments over the vesting period of the bonds, subject to continued employment and harmful acts provisions, UBS said. Members of the group executive board will be receiving 40 percent of their bonuses in these bonds, while all other employees with total compensation of more than $250,000 will get 30 percent of their performance awards in such instruments. In both cases, the bonds are granted as a deferred cash award that vests in the fifth year, UBS said.

Executive board members will also be getting deferred stock awards, making up 40 percent of their total bonus, which will vest in three equal tranches in years three, four and five. Deferred stock awards for other employees will vest in two equal tranches in years two and three, the bank said. The awards for most senior staff are also subject to group and divisional performance conditions.

To contact the reporter on this story: Elena Logutenkova in Zurich at

To contact the editor responsible for this story: Frank Connelly at

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