Key elements for decision-making process within the Compensation Committee

Actual process and decisions taken

The Human Resources and Compensation Committee makes decisions on individual executive compensation based on:

the individual performance and personal contributions of each member;
actual UBS compensation in prior periods;
an assessment submitted by the Chairman of the BoD; and
market data of competitors.

However market data is only one of several factors in the compensation decision-making process. Market data informs but does not directly drive any individual decisions on executive compensation. In addition, the Human Resources and Compensation Committee takes into consideration input from the Group Chief Executive Officer (Group CEO) when making compensation decisions for GEB members.

Key competitors

Compensation and benefit levels are primarily result-driven and further benchmarked against appropriate key competitors. These companies are selected for the similarity of their core business to that of UBS, as well as for comparable size, geographic distribution, business strategy and performance.

Typically, these are also the companies from which UBS is most likely to hire and to which it is most likely to lose senior employees. Competitive compensation at a senior level is therefore a vital element in preventing the loss of leadership talent and experience from UBS to its competitors. Generally nine key competitors are considered to represent the most relevant labor market for senior executive compensation: Credit Suisse, Deutsche Bank, Bear Stearns, Citigroup, Goldman Sachs, JPMorgan Chase, Lehman Brothers, Merrill Lynch and Morgan Stanley. In the view of the Compensation Committee, UBS’s compensation systems are positioned appropriately relative to these nine key competitors. For certain positions and for purposes of other analysis (including the best practice review), additional competitors may be taken into account (such as other major international banks, the large Swiss private banks, private equity firms and hedge funds, which are increasingly becoming attractive alternatives for UBS employees).

Key peers: comparison by business activities

Determination of 2007 incentive targets

In February 2007, the Human Resources and Compensation Committee defined personal incentive targets for each executive. Beginning with the individual incentive award for 2006, the Human Resources and Compensation Committee then applied the following steps:

a fixed percentage (increase or decrease) representing the difference between the 2007 financial forecast and the 2006 actual results – the 2006 results used were net profit attributable to UBS shareholders at the UBS Group level, and, where applicable, profit before tax adjusted for goodwill funding and impairment charges at the business group level;
a fixed reduction averaging 5% of the amount resulting from step one, being a productivity gain to shareholders – this means an overall increase of 5% in 2007 business performance would be required relative to 2006 in order to achieve the same level of compensation in both years (if 2007 business results had remained at the same level as 2006, the target incentive awards to senior executives would have been on average 5% lower, before the application of the final discretionary adjustment); and
an individual discretionary increase or decrease, taking into account future potential, any change in role, and competitive positioning.

Determination of 2007 actual incentives

In early February 2008, actual 2007 results were assessed against the 2007 forecast (UBS’s Group and business group financial targets) as well as against similar metrics of key competitors. Incentive awards of senior executives in Global Wealth Management & Business Banking, Global Asset Management and the Investment Bank were based equally on the financial performance of the Group overall and the results of the respective business group (on a 50:50 ratio). Incentive awards for executives at Group level and in Corporate Center were based fully on Group performance.

These measurements and assessments resulted in a fixed theoretical incentive award for each senior executive. Finally, this theoretical incentive award was measured against various additional factors: personal performance against objectives, future potential, leadership qualities and contributions to the overall success of UBS. This qualitative assessment led to discretionary increases or decreases from the theoretical incentive by up to + / –25%.

Marcel Rohner was Chairman and CEO of Global Wealth Management & Business Banking until early July 2007. He was entitled to receive an incentive award for his time in this position given the business group’s excellent full-year results. However, he chose to forgo the 2007 incentive award.

GEB members appointed during the last quarter of a financial year are generally assessed on their Group Managing Board targets and performance objectives, while nevertheless taking account of the overall Group results. No long-term incentive stock option awards were granted to senior executives in February 2008.

Decision making process for 2007 senior executive compensation

Performance factors used to determine 2007 senior executive compensation

The Human Resources and Compensation Committee considered the following factors when determining incentive awards for senior executives:

Performance factors exceeding 2007 target

results in all businesses of Global Wealth Management & Business Banking were at an all-time high, with net new money inflows in this business group 37% above 2006 levels;
in 2007, investment banking (corporate finance) net revenues rose 39% from 2006 to the highest level ever recorded, driven by double-digit growth in Asia Pacific and Europe, Middle East & Africa; and
during 2007, UBS’s businesses in Asia Pacific made a record contribution to the Group’s global revenues.

Performance factors below target

for the full-year 2007, UBS recorded a Group net loss attributable to its shareholders of CHF 4,384 million, entirely due to very weak trading results and writedowns in its fixed income, currencies and commodities (FICC) area;
overall, UBS’s net new money also fell, by 7.3% to CHF 140.6 billion for full-year 2007, driven by net new money outflows in Global Asset Management;
return on equity for full-year 2007 was negative 10.2% compared to 26.4% in 2006, despite strong results posted by UBS’s wealth and asset management businesses;
earnings per share for 2007 were negative CHF 2.49, compared with positive CHF 5.57 for 2006; and
UBS’s return on equity and total shareholder returns are below the median achieved by its key competitors. Since third quarter 2007, UBS’s share price has underperformed that of its peers. It has also significantly underperformed the SMI and DJ indices.

Other performance factors taken into account

Global Asset Management’s pre-tax profits were down 5.5% on 2006. Excluding the costs for the closure of Dillon Read Capital Management of CHF 384 million, however, the business group results would have been at record level and 22% higher than in 2006.

The decrease of 67% over the 2006 compensation figures for all senior executives takes into account the losses occurred in 2007. Total incentive awards for 2007 granted to senior executives represented 0.56% of the overall incentive awards distributed to UBS employees as a whole. This is down substantially from the corresponding figure of 1.85% for 2006.