Compensation, shareholdings and loans

Our competitive strength depends on our ability to attract, retain and motivate the most talented people in ­financial services. The policies established by the Board of Directors Compensation Committee create incentives to promote an entrepreneurial, performance-driven culture and to support the firm's integrated business ­strategy. By linking the compensation of senior executives to sustainable shareholder returns while adhering to our ethical values, the Compensation Committee aims to establish a framework for long-term value creation.

Compensation Committee

The Compensation Committee is made up of three non-executive, independent members of the Board. As of 31 December 2006, these were Rolf A. Meyer (chair), Sir Peter Davis and Peter Spuhler.

Governance, authorities and responsibilities

UBS has long been committed to the highest standards of corporate governance. The approval of senior executive compensation follows a rigorous process designed to ensure that no one participates in any decision affecting his or her own compensation.

The Compensation Committee is responsible for reviewing the Group Compensation Policy for submission to the Board.

Additionally – for executive members of the Board of Directors and members of the Group Executive Board (senior executives) – it has responsibilities in five key areas:

1. Reviewing and approving the design of the compensation system, including compensation programs and plans;

2. Determining the relationship between pay and performance;

3. Approving salaries and incentive awards for senior executives;

4. Reviewing and approving individual employment contracts; and

5. Reviewing and approving the terms and conditions for GEB members relinquishing their positions.

Authority for compensation-related decisions is governed by the appendix to UBS's Organization Regulations and by the charter of the Compensation Committee. The structure is as follows:

Activities

During 2006, the Compensation Committee carried out:

–A review of best practice in compensation governance, design, pay mix and disclosure. This combined publicly-available data on key competitors with information provided by compensation consultants;

– A review of pay and performance to ensure that senior executive compensation levels were appropriate compared with counterparts of competitors;

– A review of the compensation plan rules for senior executives to ensure they clearly reflected shareholders' interests and provided appropriate incentives for long-term value creation.

The Compensation Committee did not appoint any external compensation consultants during 2006. Rather, it relied on detailed background documentation – internal and external compensation surveys and other intelligence – provided by internal human resources specialists as well as on data from Group Controlling and Accounting. The Committee Chairman also made use of information obtained through his participation in various international seminars for compensation professionals.

Senior executive compensation policy

Principles

Two related principles govern our senior executive compensation programs (and, indeed, the compensation of all UBS employees): creation of shareholder value and pay for performance. Specifically:

–All elements of compensation are managed in a globally consistent and integrated fashion, with clear recognition of pay for performance;

–Compensation levels and practices are benchmarked against competitors; and

–Significant exposure to UBS shares serves to align senior executive and shareholder interests.

Annual total compensation is competitively positioned and we place a strong emphasis on the variable components of compensation, with the understanding that only superior performance will be rewarded with superior compensation. Such incentives provide the motivation to excel in the entrepreneurial, performance-oriented culture that is required to execute our integrated business strategy. In addition, the Compensation Committee verifies whether the senior executive fulfilled their objectives, in particular with regard to the importance of maintaining and spreading UBS's ethical values throughout the firm.

Shareholder Alignment

The Compensation Committee structures senior executive compensation to ensure alignment with shareholder interests and long-term value creation. Specifically:

–It rewards the achievement of personal and business objectives that balance individual performance and long-term business growth;

–A minimum of half of the annual incentive compensation awarded to senior executives takes the form of UBS shares that vest or become unrestricted over five years, ensuring focus on long-term decisions and actions, and aiding retention of executive talent.

–In addition to this significant mandatory deferral of compensation, all senior executives are required to accumulate and hold five times their cash compensation in UBS shares after five years in their position;

–The strike price of stock options is set at 110% of the average high and low sale price of UBS shares on the grant date resulting in a 10% performance hurdle; significant share price growth is thus required before the exercise price becomes meaningful;

–In certain circumstances, share and stock option plans are forfeited at termination or thereafter;

–No additional severance payments are offered in instances of termination, although obligations earned up to and including the notice period are honoured in line with the contractual arrangements; and

–All senior executives are offered the opportunity to invest voluntarily in additional UBS shares from their cash compensation.

All these mechanisms help focus senior leadership on the long-term interests of UBS shareholders and minimize the cost of any future terminations.

Pay for performance

UBS is committed to providing superior compensation only in return for superior performance, and continually strives to improve the benchmarks and processes that support informed compensation decision-making.

At the beginning of the year, each UBS senior executive agrees individual objectives and Key Performance Indicators (KPIs). Individual objectives focus on clients, economics, technical expertise, leadership, cross-business co-operation, strategic impact and personal contribution. KPIs vary by business and by individual; they typically include such measures as revenue growth, net profit, return on equity, return on assets, cost/income ratio, net new money, progress on strategic initiatives and adherence to UBS values.

Financial performance targets are clearly defined at UBS Group and Business Group levels.

As the year draws to a close, a senior executive's performance against each objective and KPI is rigorously evaluated, not only by his or her immediate superior but also by peers and subordinates. This 360-degree assessment is both qualitative and quantitative – comprising financial and operational results for the year, as well as indicators of future performance. Performance against key competitors and performance trends over time are likewise reviewed, to the extent data is available.

To the extent that a senior executive's business and individual performance exceeds – or falls short – of his or her agreed expectations, total compensation mirrors the outcome. In consequence, compensation levels can (and often do) vary widely from year to year.

Elements of compensation

Total compensation for senior executives comprises four elements: base salary, incentive awards, stock option awards and benefits.

Base salaries Base salary levels are established in a manner consistent with the role of each senior executive. Base salary adjustments are limited to significant changes in job responsibility. Due to the variability of annual incentive awards, the ratio of base salary – a fixed amount – to total compensation can vary significantly year to year. In 2006, base salaries for senior executives constituted, on average, some 6.5% of total compensation. Annual incentive awards Each annual incentive award is assessed according to the individual's achievement of his or her business goals and personal objectives. All senior executives are considered for an annual incentive award provided performance targets are achieved, but with a few rare exceptions (e.g., competitive practice or business strategy), annual incentives are completely discretionary and vary considerably, both from individual to individual and from year to year. Exceptional individual performance is reflected in the annual incentive award rather than in an adjustment to base salary. The maximum annual incentive award is limited to double the senior executive's target. 50% of the annual incentive award is granted in the form of mandatory restricted or deferred UBS shares; senior executives also have the opportunity to invest a further portion of their annual incentive in UBS shares, which attract a "two for one" stock option match. In certain jurisdictions, senior executives may also be offered the opportunity to invest a portion of their cash incentive in vehicles not related to UBS shares, provided such investment does not jeopardize their individual shareholding requirement. Discretionary stock option awards Stock options help align executive performance with long-term shareholder interests, since they deliver value only to the degree the share price appreciates more than 10% after the grant. At UBS, discretionary stock option awards reward the individual's contribution to the overall success of the firm. They do not form part of the annual incentive award but are a reflection of the success of our integrated business model. The Board of Directors approves an annual option quantity for a three-year period. Within this limit, the Chairman's Office annually allocates option quantities to the Business Groups and Corporate Center. Benefits UBS provides benefits to help attract and retain the best employees in each local market. Changes, terminations and the introduction of new benefits are governed by the procedures contained in the firm's Organization Regulations. Benefits are a supplemental element of total compensation and vary substantially from location to location. In Switzerland, for example, senior executives participate in a general pension plan made up of three elements: (1) a basic component operated on the defined benefit principle (defined contribution principle as of 1.1.2007); (2) a savings plan to bridge the income gap between UBS retirement age and the age defined for the start of social security payments; and (3) a defined contribution bonus plan. No special pension schemes are offered to senior executives. Outside Switzerland, senior executives participate in appropriately designed local pension plans. In the US, the firm offers two plans – one operating on a cash-balance basis, the other on defined contributions. US senior executives may also participate in a 401K defined contribution plan open to all employees. In the UK, senior executives participate in a pension plan operated on a defined contribution basis. (Note 31 to the UBS Group financial statements details the various retirement benefit plans established in Switzerland and in major foreign markets.)

Senior executive compensation plans

Senior Executive Equity Ownership Plan (SEEOP)

Under SEEOP, senior executives typically receive a minimum of 50% of their annual incentive award in the form of UBS shares. (This amount is subject to the discretion of the Compensation Committee.) Unless prohibited by local law, senior executives receive actual UBS shares with the same rights as ordinary shareholders. Shares are denominated either in CHF or USD depending on the currency of the executive's incentive.

Shares normally vest in equal portions over a period of five years. For tax reasons, shares of Swiss-based senior executives are additionally restricted from sale for the duration of the five-year period.

Shares that have not vested at the time of termination are subject to forfeiture under certain circumstances; these include voluntary termination to join a competitor, termination for cause, or in connection with activities detrimental to the interests of UBS.

Senior Executive Stock Option Plan (SESOP)

Discretionary stock option awards are a long-term incentive, based on the individual past performance of each senior executive, their contribution to the overall success of the firm and their future potential.

All senior executives may be granted discretionary stock options under SESOP and are eligible to receive two matching stock options for each share they voluntarily purchase from cash compensation granted under the additional SEEOP program.

The strike price for senior executive stock options is set at 10% above the UBS share price on the grant date. This performance hurdle creates a strong incentive for senior executives to build sustainable shareholder value over the longer term.

Options normally vest after three years and remain exercisable for seven further years. Any unvested options will generally be forfeited should the executive leave voluntarily, join a competitor, be terminated for cause or act against the firm's interests.

Senior executive share ownership policy

With a view to aligning the interests of its management with those of its shareholders, UBS strongly encourages significant levels of stock ownership on the part of its senior executives.

–As previously noted, a substantial part of the annual incentive award for senior executives is delivered in the form of mandatory restricted or deferred UBS shares.

–Senior executives, moreover, who voluntarily elect to take an even greater proportion of their annual incentive award in the form of restricted or deferred UBS shares receive two additional UBS stock options for each additional share. The options are granted under SESOP in accordance with the conditions described before.

Five years after appointment, senior executives are required to accumulate – and then hold – UBS shares with an aggregate value of five times the amount of the last three years' average cash component of total compensation (base salary plus cash portion of incentive award). Holdings in UBS shares to be accumulated range from CHF 19 million to CHF 71 million per senior executive and thus constitute a substantial part of their personal wealth. Progress reports are provided to each senior executive annually, and executives will be expected to make steady progress towards their targets. Missed targets may lead the Compensation Committee to deny the grant of discretionary stock option awards.

In view of the SEEOP program, the employee "Equity Plus" program is not offered to senior executives.

Contracts of employment and severance payments

The Compensation Committee regularly reviews the individual employment contracts of senior executives. These contracts provide for a general notice period of twelve months, during which time the senior executive is entitled to receive salary and a pro rata incentive, unless he has been terminated for cause.

The Compensation Committee has drawn up special employment agreements for the Chairman of the Board and the Executive Vice Chairmen. These agreements reflect the fact that these officers are appointed by UBS shareholders to a three-year term and may be terminated only by means of a shareholders' vote.

Neither the GEB employment contracts nor the contracts for executive members of the BoD provide for any additional severance payment in case of termination apart from the normal salary and bonus entitlements. All payments are included in the numbers reported under the compensation for members of the Board and the GEB.

Key elements for decision-making process within the Compensation Committee

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: Bear Stearns, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Lehman Brothers, Merrill Lynch and Morgan Stanley. In the view of the Compensation Committee, UBS's compensation systems compare favorably with 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 the large Swiss private banks, private equity firms and hedge funds, which are increasingly becoming attractive alternatives for our employees).

Actual process and decisions taken

The Compensation Committee makes decisions on individual senior executive compensation based on: (1) the individual performance and personal contributions of each member; (2) market data of competitors; (3) actual UBS compensation in prior periods; and (4) an assessment submitted by the Chairman of the Board. It also takes into consideration the proposals made by the Group CEO when making compensation decisions for GEB members.

Determination of 2006 incentive targets

In February 2006, the Compensation Committee defined personal incentive targets for each senior executive. Beginning with the individual incentive award for 2005, the Committee then applied the following steps:

i. a fixed % (increase or decrease) representing the difference between the 2006 financial forecast, and the 2005 actual results. The 2005 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.

ii. a fixed reduction averaging 5% of the amount resulting from step i, being a productivity gain to shareholders. This means that an overall increase of 5% in 2006 business performance would be required relative to 2005 in order to achieve the same level of compensation in both years. If 2006 business results had remained at the same level as 2005, the target incentive awards to senior executives would have been on average 5% lower, before the application of the final discretionary adjustment.

iii. An individual discretionary increase or decrease, taking into account future potential, any change in role, and competitive positioning.

Determination of 2006 actual incentives

In early February 2007, actual 2006 results were assessed against the 2006 forecast (UBS's Group and Business Group financial targets) as well as against similar metrics of key competitors. 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 based on individually defined criteria, 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%.

Long-term incentive option awards for 2006 were granted in February of the same year, based on the individual past performance of each senior executive, their contribution to the overall success of the firm and their future potential.

Decision-making factors for 2006 senior executive ­compensation

At the Group level, 2006 financial results exceeded internal targets and outperformed those of many competitors. UBS achieved a return on equity from continuing operations of 26.5%. This return exceeded the internal target of >20% as well as that of all but one of the firm's peers. The 20% increase in diluted earnings per share from continuing operations is well in line with UBS's target of double-digit average annual growth. Total shareholder returns for the year under review were 21.5%. Cumulatively over a three-year period, they were 90.3%, and 104.4% over a five-year period. The UBS share price, moreover, has outperformed the DJ Stoxx Banks Europe Index over the recent three-year period by 15.4%.

While UBS's share price appreciation and total shareholder returns – achieved over the most recent three- and five-year periods – are significantly better than the average performance of the peer group, it underperformed the average of its peers over the 2006 period. At the Business Group level, financial performance improved in all the firm's core businesses, with a commensurate rise in both market share and competitiveness.

In determining the total compensation of senior executives, the Compensation Committee took into account three key factors behind the firm's 2006 performance: (1) that EPS growth was strongly driven by profit (as opposed to share buybacks); (2) that this increased profit was derived primarily from revenue growth (not simply cost reduction); and (3) that the firm is successfully executing major strategic investment initiatives.

Actual 2006 compensation for executive members of the Board of Directors and the Group Executive Board

Total compensation for the financial year 2006 (base salary, incentive awards, stock options, employer's contributions to retirement benefit plans, benefits in kind and fringe benefits) for the three executive members of the Board of Directors, the ten members of the Group Executive Board in charge as of 31 December 2006, was CHF 246,832,740. The increase of 10.9% over last year's compensation figures compares favorably with the increase in Group profits of 18% (and 19% for the financial businesses). Total incentive awards for 2006 granted to senior executives represented 1.85% of the overall incentive awards distributed to UBS employees as a whole. The ratio of total compensation of all senior executives to UBS's net profit before tax in 2006 was 1.51% excluding stock options and amounted to 1.68% including stock options based on fair market value. The corresponding ratios in 2005 were 1.55% and 1.71%.

Changes in the composition of the two corporate bodies – as well as an ongoing redefinition of executive roles – clearly impact the disclosed total compensation number and should be taken into consideration in any year-on-year comparison. While no changes took place in the two bodies during all of 2006, John Costas retired from the GEB at the end of 2005 and Rory Tapner joined the GEB as of 1 January 2006 as Chairman and CEO of Asia Pacific. Mark Sutton retired as of 1 January 2007. Due to obligations following a special contract in light of the reorganization in the US, a GEB member is entitled to receive USD 11 million for 2007 payable in 2008 and USD 5.5 million for 2008 payable in 2009. The full amount for the three-year contract has been accrued against the 2005 income statement.

Explanations:

–Number and distribution of senior executives:

–2004: three executive BoD, seven GEB members in office as of 31 December and two who stepped down during the year.

–2005: three executive BoD, and ten GEB members in office as of 31 December and one executive BoD who retired during the year.

–2006: three executive BoD, and ten GEB members in office as of 31 December.

–Benefits in kind: car leasing, company car allowance, staff discount on banking products and services, health and welfare benefits, general expense allowances.

–Shares for 2006 are valued at CHF 75.85 per share (average price of UBS shares at virt-x over the last ten trading days of February 2007), and USD 61.49 per share (average price of UBS shares at the NYSE over the last ten trading days of February 2007). 2005 values per share: CHF 70.75 / USD 53.93. 2004 values per share: CHF 50.90 / USD 43.37.

–Options on UBS shares were granted at a strike price of CHF 77.33. This represents ten percent above the average high and low price at the virt-x on the last trading day of February 2006. Options vest three years after grant and expire ten years after the date of grant.

–Fair values per option at grant: CHF 10.40 for options granted in February 2006; CHF 6.23 / USD 6.73 for options granted in February 2005 and CHF 9.54 for options granted to match higher share elections in February 2007. No US dollar options have been issued since February 2005. 2004 fair values per option at grant: CHF 11.95 / USD 10.26.

–Retirement plan benefits: In Switzerland, UBS senior executives participate in the firm's general pension plans. These comprise: (1) a basic component operated on the defined benefit principle (defined contribution principle as of 1.1.2007); (2) a savings plan to bridge the income gap between UBS retirement age and the age defined for the start of social security payments; and (3) a defined contribution principle bonus plan. In 2006, the cap compensation amount included in these plans (for all employees) was set at CHF 774,000. This translates into a maximum annual pension of CHF 313,708 after retirement plus a one-off payout of accumulated capital from the savings plan, in a maximum amount of CHF 297,617. In the US there are two different plans, one operating on a cash balance basis, which entitles the participant to receive a contribution based on compensation limited to USD 250,000. The other plan is a defined contribution plan with compensation included up to a limit of USD 220,000. US senior executives may also participate in the UBS 401K defined contribution plan open to all employees. In the UK, the pension plan for senior executives is limited to an earnings cap of GBP 100,000.

Additional honorariums and remuneration

All income from business mandates must be paid or reimbursed to UBS. Senior executives have no entitlement to any compensation received by them due to any mandate-related roles undertaken on behalf of UBS, its subsidiaries or its clients.

No additional honorariums or remuneration were paid to any of the Board or GEB members.

Loans granted to executive Board members and members of the GEB

UBS – as a global financial services provider as well as the major bank in Switzerland – typically has business relationships with most large companies. In many of these, UBS Board members often assume management or non-executive board responsibilities. Moreover granting loans – both to individuals and to companies – is part of the ordinary business of UBS. Executive members of the Board and the members of the GEB are granted loans, fixed advances and mortgages at the same terms and conditions as other employees, based on third-party conditions adjusted for reduced credit risk.

As of 31 December 2006, mortgages in the amount of CHF 17,559,250 had been granted to six members of the group of senior executives and their close family members. Loans granted to a private investment company related to one GEB member amounted to CHF 6,500,000.

Highest total remuneration for a BoD member

Total compensation for the highest-paid member of the Board of Directors, Chairman Marcel Ospel, amounted to CHF 26,591,803 for the financial year 2006. The increase of 10.9% over his 2005 total compensation compares favorably to the Group's profit increase for financial businesses of 19%.

Compensation of the Chairman

Assessment elements for the Chairman's compensation

For its decision on the Chairman's compensation, the Committee relies on an annual assessment performed by the full Board and on its own judgment of his performance and contributions, taking into account pay levels for comparable functions outside UBS.

The Chairman's compensation also reflects other significant accomplishments such as his decisive role in shaping UBS as a global leading financial services firm and his contribution to the creation of a strong leadership team. In addition, the Chairman worked with the Nominating Committee to recruit two new qualified directors to the Board, further strengthening the composition of the UBS Board.

UBS's key competitors paid total annual compensation of between CHF 18 million and CHF 48 million to their Chairman and / or CEOs in 2005. Median pay for the Chairman and / or CEO of this group was CHF 30 million; the second highest value stood at CHF 44 million. These numbers include base salaries, cash bonus and the fair value of equity-based awards.

Compensation for former members of the Board and GEB

Six former senior executives of UBS and its predecessor banks benefited from the use of office space and administrative support, mostly in connection with mandates they continue to hold on behalf, or in the interests, of UBS. The total value of these benefits amounted to CHF 2,075,199 in 2006.

Additional information on equity-based compensation

Disclosure differences between IFRS and SWX requirements

Since 1 January 2005, expensing of equity-based compensation has become mandatory. International Financial Reporting Standards (IFRS) require entities to recognise the fair value of share-based payments to employees as a compensation expense, recognised over the service period (typically equivalent to the vesting period). Disclosure of share-based compensation in UBS financial statements is, therefore, reported on this accounting basis. The disclosure of compensation in this report, however, is based solely on share and option valuation at fair value for the grant period.

Disclosure of management transactions

Since 1 July 2005, UBS has disclosed to the SWX on a no-name basis all transactions in the firm's shares and options by members of its Board of Directors and GEB. In 2006, shares and options worth CHF 100.6 million were sold by ten members of the Board of Directors and GEB. During the reporting period, shares worth CHF 1 million were bought by four members of the Board of Directors. The predominately sales-driven transactions have to be viewed in the light of the fact that senior executives receive at least 50% of their incentive pay in shares and options, and that stringent shareholding requirements apply.

Non-executive directors' remuneration

–Remuneration of non-executive directors is not dependent on the Group's financial performance.

–Board members receive a base fee of CHF 300,000. This excludes a CHF 15,000 reimbursement of business expenses incurred in the performance of their duties.