Note 32 Equity Participation and Other Compensation Plans

a) Plans offered

UBS has established several equity participation plans to further align the long-term interests of executives, managers and staff with the interests of shareholders. The plans are offered to eligible employees in approximately 50 countries and are designed to meet the complex legal, tax and regulatory requirements of each country in which they are offered. The explanations below describe the most significant plans in general, but specific plan rules may vary by country.

Equity Plus Plan (Equity Plus): This voluntary plan gives eligible employees the opportunity to purchase UBS shares at fair market value on the purchase date and generally receive at no additional cost two UBS options for each share purchased, up to a maximum annual limit. The options have a strike price equal to the fair market value of the shares on the date the option is granted and are forfeitable in certain circumstances. Share purchases can be made annually from bonus compensation and/or quarterly based on regular deductions from salary. Shares purchased under Equity Plus are restricted from sale for two years from the time of purchase, and the options granted have a two-year vesting period and generally expire ten years from the date of grant.

Discounted purchase plan: Up to and including 2005, ­selected employees in Switzerland were entitled to purchase a specified number of UBS shares, which must be held for a specified period of time, at a predetermined discounted price each year. No new awards are made under this plan.

Equity Ownership Plan (EOP): Selected employees receive between 10% and 45% of their performance-related compensation in UBS shares or notional UBS shares instead of cash, on a mandatory basis. Up to and including 2004, certain employees were eligible to receive a portion of their EOP award in Alternative Investment Vehicles (AIVs) or UBS options. Since 2005, options are not granted as part of EOP and awards are generally made in UBS shares, with less than 5% being made in AIVs to selected employee groups. EOP awards vest in one-third increments over a three-year vesting period. In certain circumstances, these awards are forfeitable.

Key Employee Stock Option Plan (KESOP): Key and high potential employees are granted UBS options with a strike price not less than the fair market value of the shares on the date the option is granted. One option gives the right to acquire one registered UBS share at the option's strike price. Options generally vest in one-third increments over a three-year vesting period and generally expire ten years from the grant date. In certain circumstances, these awards are forfeitable.

Other plans: UBS sponsors a deferred compensation plan for selected eligible employees. Generally, contributions are made on a voluntary and tax deferred basis, and participants are allowed to notionally invest in AIVs (generally money market funds, UBS and non-UBS mutual funds and other UBS sponsored funds). No additional company match is granted, and the awards are generally not forfeitable. In addition, UBS also grants other compensation awards to new recruits and key employees, generally in the form of UBS shares or options.

UBS satisfies share delivery obligations under its option- based participation plans either by purchasing UBS shares in the market on grant date or shortly thereafter or through the issuance of new shares. At exercise, shares held in treasury or newly issued shares are delivered to the employee against receipt of the strike price. As of 31 December 2006, UBS was holding approximately 115 million shares in treasury and an additional 150 million unissued shares in conditional share capital which are available and can be used for future employee option exercises. The shares available cover all vested (i.e. exercisable) employee options.

UBS estimates the grant date fair value of shares awarded during the year by using the average UBS share price on the grant date as quoted on the virtX. The market value of shares vested was CHF 1,587 million, CHF 1,083 million and CHF 1,922 million for the years ended 31 December 2006, 31 December 2005 and 31 December 2004, respectively.

The weighted average share price at the time when the options were exercised during the year was CHF 71, CHF 53 and CHF 46 for the years ended 31 December 2006, 31 December 2005 and 31 December 2004, respectively.

The following table provides additional information about option awards:

The weighted average share price at the time when the options were exercised during the year was CHF 71, CHF 53 and CHF 46 for the years ended 31 December 2006, 31 December 2005 and 31 December 2004, respectively.

The following table provides additional information about option awards:

In addition, UBS received cash of CHF 1,698 million and CHF 2,018 million and an income tax benefit of CHF 153 million and CHF 217 million from the exercise of share options for the years ended 31 December 2006 and 31 December 2005, respectively.

The intrinsic value of share-based liabilities (shares and options) paid for the years ended 31 December 2006, 31 December 2005 and 31 December 2004 was CHF 177 million, CHF 87 million and CHF 669 million, respectively.

The following table summarizes additional information about options outstanding and options exercisable at 31 Decem- ber 2006:

d) Valuation

The fair value of options granted from 1 January 2005 has been determined by means of a Monte Carlo simulation. The simulation technique uses a mix of implied and historic volatility and specific employee exercise behavior patterns based on statistical data, taking into account the specific terms and conditions under which the options are granted such as the vesting period, forced exercises during the lifetime, and gain- and time-dependent exercise behavior. The expected term of each option is calculated as the probability-weighted average period of the time between grant and exercise. The term structure of volatility is derived from the implied volatilities of traded UBS options in combination with the observed long-term historic share price volatility. Dividends are assumed to grow at a 10% yearly rate over the term of the option.

The fair value of options granted during 2006 and 2005 was determined using the following assumptions:

The fair value of options granted during 2004 was determined using a proprietary option pricing model, similar to an ­American-style binomial model, using the following assumptions:

The expected life was estimated on the basis of observed employee option exercise patterns. Volatility was derived from the observed long-term historic share price volatility aligned to the expected life of the option. Dividends were assumed to grow at a 10% yearly rate over the expected life of the option.

e) Compensation expense

Generally, under IFRS, for all employee share and option awards for which the underlying is UBS shares, UBS recognizes compensation expense over the requisite service period which is generally equal to the vesting period. Share and option awards typically have a three-year tiered vesting structure which means awards vest in one-third increments over that period. The total share-based compensation expense recognized for the years ended 31 December 2006, 31 December 2005 and 31 December 2004 was CHF 2,188 million, CHF 1,662 million and CHF 1,406 million, respectively. The total income taxes recognized in the income statement in relation to these expenses were a benefit of CHF 491 million, CHF 431 million and CHF 64 million for the years ended 31 December 2006, 31 December 2005 and 31 December 2004, respectively. For the years ended 31 December 2006, 31 December 2005 and 31 December 2004, the compensation expense recognized for share-based payments was primarily related to equity settled plans.

At 31 December 2006, total compensation expense related to nonvested awards not yet recognized in the income statement is CHF 1,679 million, which is expected to be recognized in Personnel expenses over a weighted average period of 1.7 years.