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UBS shakes up pay scheme

Becomes first bank to follow the EU commission recommendations.

The Swiss financial services giant UBS will pay bonuses for 6,500 senior bankers in the form of bonds as part of its new bonus structure.

The EU commission led by Finnish central banker Erkki Liikanen in 2012 stressed for bonuses to be partly based on “bail-inable” debt that can be converted to equity or wiped out if the lender fails to meet capital requirements.

With this move, UBS becomes the first bank to follow recommendations of the commission apart from becoming Switzerland’s largest lender of assets.

Banks including Credit Suisse and Royal Bank of Scotland (RBS) have used debt instruments mostly linked to specific and troubled legacy assets for bonuses over the years. Such debt instruments increase a bank’s regulatory capital while addressing conflicting demands of investors, regulators and employees.

Compared to other banks, UBS’s debt bonus will be written down to zero if its regulatory capital falls below 7 per cent or in the case of a “non-viability” loss.

Industry analysts said that UBS may become a role model for other banks that are under pressure from investors and regulators to more closely align pay with all stakeholders, including creditors.

Christopher Wheeler, analyst at Mediobanca, told the Financial Times: “It is attractive because banks can build up further capital and employees get a nice coupon.”

Axel Weber, who joined UBS as chairman in 2012, has spent few months gathering ideas from shareholders on how to change pay structures.

The reform, which will be appliable for 2013 bonus pool, will see the Swiss bank hike the amount of pay that is deferred. Moreover, the $1.5bn fine paid by UBS for the manipulation of Libor will also be reflected in 2013 bonus round.

The Swiss regulator Finma urged UBS to take into consideration the Libor scandal while setting bonuses.

UBS’ group executive board members will get 80 per cent bonus instead of the previous 60 per cent paid in later years. Their share awards will be paid out after three, four and five years. However, bankers earning more than $250,000 will have 60 per cent of their bonuses deferred.

UBS will also force its chief executive Sergio Ermotti to hold 500,000 shares – worth 7.8m Swiss francs ($8.6m) - at the current share price,  instead of the 300,000 under the old rules.

Meanwhile, UBS will hold a planned cap on bankers’ bonuses until 2014 due to lack of clarity on how the issue will be regulated in Switzerland and Europe.

Photo: Getty Images
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David Cameron’s starter homes: poor policy, but good politics

David Cameron's electoral coalition of buy-to-let retirees and dual-earner couples remains intact: for now.

The only working age demographic to do better under the Coalition was dual-earner couples – without children. They were the main beneficiaries of the threshold raise – which may “take the poorest out of tax” in theory but in practice hands a sizeable tax cut to peope earning above average. They will reap the fruits of the government’s Help to Buy ISAs. And, not having children, they were insulated from cuts to child tax credits, reductions in public services, and the rising cost of childcare. (Childcare costs now mean a couple on average income, working full-time, find that the extra earnings from both remaining in work are wiped out by the costs of care)

And they were a vital part of the Conservatives’ electoral coalition. Voters who lived in new housing estates on the edges of seats like Amber Valley and throughout the Midlands overwhelmingly backed the Conservatives.

That’s the political backdrop to David Cameron’s announcement later today to change planning to unlock new housing units – what the government dubs “Starter Homes”. The government will redefine “affordable housing”  to up to £250,000 outside of London and £450,000 and under within it, while reducing the ability of councils to insist on certain types of buildings. He’ll describe it as part of the drive to make the next ten years “the turnaround decade”: years in which people will feel more in control of their lives, more affluent, and more successful.

The end result: a proliferation of one and two bedroom flats and homes, available to the highly-paid: and to that vital component of Cameron’s coalition: the dual-earner, childless couple, particularly in the Midlands, where the housing market is not yet in a state of crisis. (And it's not bad for that other pillar of the Conservative majority: well-heeled pensioners using buy-to-let as a pension plan.)

The policy may well be junk-rated but the politics has a triple A rating: along with affluent retirees, if the Conservatives can keep those dual-earner couples in the Tory column, they will remain in office for the forseeable future.

Just one problem, really: what happens if they decide they want room for kids? Cameron’s “turnaround decade” might end up in entirely the wrong sort of turnaround for Conservative prospects.

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.