UBS’s $26 Million Award for Orcel Dwarfs Pay of CEO Ermotti

By Elena Logutenkova

UBS AG (UBSN) Chief Executive Officer Sergio Ermotti’s 2012 pay of 8.87 million Swiss francs ($9.3 million) was dwarfed by the 24.9 million francs in cash and stock investment bank headAndrea Orcel got on joining the bank.

Orcel received 6.36 million francs in deferred cash and 1.76 million UBS shares with a fair market value of 18.5 million francs on the date they were granted, the Zurich-based bank said today in its 2012 report, without disclosing his annual compensation. The award replaces pay Orcel forfeited when he left Bank of America Corp., UBS said. Orcel, 49, joined UBS in July to co-head the investment bank with Carsten Kengeter before taking over as the unit’s sole chief in November after UBS decided to exit most debt-trading businesses and cut 10,000 jobs over three years to concentrate on money management. The investment bank posted a pretax loss of 2.73 billion francs for 2012 on reorganization charges, while UBS posted a net loss of 2.51 billion francs after booking costs for job cuts and a fine for rigging global interest rates.

UBS changed its pay structures, limiting cash payouts, after almost 37 percent of shareholders voted last May against the bank’s 2011 compensation report. Swiss voters in a referendum earlier this month backed a proposal giving shareholders a binding vote each year on executive pay as part of an initiative that also bans big payouts for new hires and departing executives.

Right Balance

“We’ll probably never find a perfect solution that always meets with approval of all stakeholders, but we want to and have to find the right balance between employee interests and providing sufficient returns to our shareholders,” Chairman Axel Weber said in an internal memo to employees today. “No bank, including UBS, will be able to go through this process without looking at what the competition is doing.”

Orcel spent 20 years at Merrill Lynch before joining UBS and was among the biggest dealmakers when the U.S. firm was independent, leading the team that helped Royal Bank of Scotland Group Plc acquire ABN Amro Holding NV in 2008 in the biggest banking takeover. The Italian banker was paid $33.8 million for 2008, the Wall Street Journal reported in March 2009.

Orcel’s UBS awards may be reduced under the bank’s provisions for harmful acts, which include contributing to a “significant financial loss” and violating company policies. Orcel holds the most unvested share awards of any member of UBS’s executive board, according to the report.

CEO Pay

CEO Ermotti’s pay, which includes a base salary of 2.5 million francs, compares with 6.35 million francs the previous year, when he joined the executive board in April and took over as CEO after Oswald Gruebel resigned in September, UBS said. Ermotti replaced wealth management Americas head Robert J. McCann as the highest paid member of UBS’s board.

Barclays Plc said earlier this month it awarded CEO Antony Jenkins 2.3 million pounds ($3.4 million) for 2012, 63 percent less than the salary and long-term bonuses for 2011 given to his predecessor Robert Diamond, who was ousted following the bank’s fine related to Libor rigging. Jenkins was CEO for only the final four months of 2012.

Wealth management Americas head McCann, who turns 55 tomorrow received 8.56 million francs for 2012, down from 9.18 million francs the previous year, according to the report. McCann’s unit, which includes the former Paine Webber brokerage business the Swiss bank acquired in 2000, “managed to deliver on a spectacular turnaround” and posted a record pretax profit of $873 million for 2012, Ermotti, 52, said yesterday in a speech at the Swiss-American Chamber of Commerce in Zurich.

Bonus Pool

UBS gained 28 percent in Swiss trading last year, outpacing the 23 percent gain in the Bloomberg Europe Banks and Financial Services Index, which tracks 40 companies.

The bank cut its total 2012 bonus pool 7 percent to 2.5 billion francs, and paid about 500 million francs of that in contingent capital bonds, which will be written off if UBS’s common equity ratio falls below 7 percent or the company needs a bailout. UBS said the bonds will be granted as a deferred cash award that vests in the fifth year, subject to continued employment and forfeiture provisions for harmful acts.

An estimated 6,317 employees received the bonds, which pay notional interest of 6.25 percent for dollar and 5.4 percent for franc-denominated awards, the bank said.

Libor Factor

UBS said it took into account the cost of the fine related to the rigging of Libor, a benchmark for more than $300 trillion of financial products worldwide, when making compensation decisions. Bonus pools for the investment bank and the corporate center were reduced “to reflect the gravity of the matter,” the bank said.

The company terminated employment of 25 people and had 27 individuals sanctioned with various warnings and pay cuts as a result of Libor-related misconduct, while 26 employees left the bank before disciplinary action could be taken, it said.

The bonus pool of the investment bank was cut 20 percent, and more than 300 people, including Kengeter, forfeited 10 percent of performance awards that were due to vest in March, amounting to more than 14 million francs, UBS said.

The board decided to not pay any cash bonuses to executives for 2012 and fully defer variable pay over three to five years, UBS said today. The bank announced last month that executive cash bonuses would be capped at a maximum of 20 percent of total performance awards under a new compensation structure.

Shareholder Talks

The bank also increased minimum shareholdings for executive board members and capped their total performance award pool at 2.5 percent of adjusted pretax profit. The 11 members of the executive board in office on Dec. 31 received total compensation of 70.4 million francs for the year, compared with 70.1 million francs paid to 12 executives for 2011. Kengeter, 45, and Alexander Wilmot-Sitwell, 51, were paid a total of 1.71 million francs for serving 10 and three months, respectively, as members of the board in 2012.

The bank had discussions with its biggest shareholders to better understand their views on pay, UBS said last month. Executives who violate the terms of Switzerland’s so-called Minder initiative on pay can be punished with as long as three years in jail.

Chairman Weber was the highest-paid member of the board of directors, receiving total compensation of 3.57 million francs for 2012. Weber, who joined the board last year, also got a one- time payment upon his election of 2 million francs and 200,000 UBS shares blocked for one year, valued at 2.27 million francs at grant date.

To contact the reporter on this story: Elena Logutenkova in Zurich atelogutenkova@bloomberg.net

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