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UBS reveals new tool to claw back bonuses

By Ramy Inocencio, for CNN
February 6, 2013 -- Updated 2331 GMT (0731 HKT)
  • UBS unveils compensation model allowing bank to claw back bonuses more easily
  • Bank will pay out larger portion of bonuses in form of bonds, instead of cash
  • Bond values to be wiped out if bank needs bailout or if equity ratio falls below minimum
  • Change in bonus payout model is shift in politically-charged issue of banker bonuses

(CNN) -- Swiss banking giant UBS is changing the way it pays out bonuses to its 6,000 highest earners to limit the firm's exposure to risk and loss.

The rule change comes as the Zurich-based bank reported a huge fourth quarter loss to shareholders of $2.1 billion. A large portion of that stemmed from a December 2012 agreement to pay $1.5 billion in fines over a scandal to manipulate Libor, the rate banks use when borrowing money from one another.

Under the new compensation model, UBS will dole out a larger portion of annual bonuses in the form of bonds instead of cash. Such instruments would be fully paid out over a number of years and only if there are no major financial issues for the bank, such as the need for a bailout or if its common equity ratio falls below 7%, UBS says.

If such events happen, the value of those bonds would be wiped out, essentially erasing a portion of employee bonuses.

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Record fine for UBS

In a press release, UBS said "the changes focus UBS's employees on medium- and longer-term performance, provide them with the opportunity to benefit from the firms longer term success, and simplify UBS's compensation framework, making it more transparent."

The move signals a shift in the politically-charged issue of bank bonuses. Many financial institutions that received government bailouts during the financial crisis were contractually obligated to continue to pay out bonuses, which raised taxpayer ire.

For bank executives, the change may spur them to make less risky trades or to search for a new job at a firm with less stringent bonus pay rules, analysts say.

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