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

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UBS AG, Switzerland’s biggest bank, cut its 2012 bonus pool and introduced a form of deferred cash awards that will vest in the fifth year following the grant and can be written off if the bank’s capital falls below the minimum regulatory level.

The bonus pool, including pay deferred into future years, is 2.5 billion Swiss francs ($2.75 billion), down 7 percent 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 bonds will be granted as a deferred cash award that vests in the fifth year, subject to continued employment and harmful acts provisions.

UBS ‘Vision’

“It’s designed to attract and retain employees who share the same vision that we do for the bank, which is for us to deliver sustainable returns and also to run our businesses responsibly with an eye to the operational risk control,” Chief Financial Officer Tom Naratil said in an interview. “We think it aligns things properly.”

The 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. This would mean that employees rather than investors take the first loss if the bank runs into trouble.

“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.”

Shareholder Vote

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. The coupon for the notes will be set this month, based on the trading levels for the contingent bonds UBS sold last year, Naratil said.

UBS last year sold two contingent capital bonds with a 5 percent trigger -- $2 billion in 10-year securities with a 7.625 percent coupon in August and $2 billion in 10-year securities with a 7.25 percent coupon in February. Those bonds were trading at yields to maturity of about 6.4 percent and 7.2 percent, respectively, today.

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, the bank said.

Cash Bonuses

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, making up 30 percent of total bonuses, 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.

Cash bonuses will be capped at a maximum of 20 percent of total performance awards for the executive board members and at 40 percent for staff earning more than $250,000. The bank also increased minimum shareholdings for executive board members and capped their total performance award pool at 2.5 percent of adjusted operating profit.

UBS earlier today reported a loss for the fourth quarter and the year on reorganization charges and a fine for trying to rig global interest rates. The bank said that about 200 million francs of deferred compensation that was awarded in the previous years was forfeited in 2012 for various reasons including employees’ departures and profitability targets.