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.