Compensation, shareholdings and loans

UBS's competitive strength depends on its 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 a performance-driven culture, adhere to ethical values and support the firm's integrated business strategy. Compensation of senior executives is linked to the creation of long-term value and sustainable shareholder returns.

Compensation Committee

The Compensation Committee is made up of three non-executive, independent members of the Board of Directors (BoD). As of 31 December 2007, these were Rolf A. Meyer (Chairman of the Compensation Committee), Sergio Marchionne 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 UBS Total Compensation and Benefits Principles for submission to the BoD.

Additionally – for executive members of the BoD and members of the Group Executive Board (GEB) (senior executives) - the Compensation Committee has responsibilities in five key areas:

– reviewing and approving the design of the total compensation framework, including compensation programs and plans;

– determining the relationship between pay and performance;

– approving base salaries and annual incentive awards for senior executives;

– reviewing and approving individual employment agreements; and

– reviewing and approving the terms and conditions for GEB members relinquishing their positions.

Authority for compensation-related decisions is governed by the "Appendix to the Organization Regulations - Authorities" and the "Charter for the Compensation Committee".

Activities

During 2007, the Compensation Committee carried out:

– a review of best practice in compensation governance, design, pay-mix and disclosure, which combined publicly-available information on key competitors with market data provided by UBS's principal executive compensation consultant (Towers Perrin MGMC);

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

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

The Compensation Committee did not appoint any external compensation consultants during 2007. Rather, it relied on detailed background documentation - internal and external compensation surveys and other intelligence - provided by internal HR compensation specialists as well as on data from the Group controlling department and the accounting department. The Chairman of the Compensation Committee also made use of information obtained through participation in various international seminars for compensation professionals.

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Senior executive compensation policy

Principles

Two related principles govern the firm's senior executive compensation framework (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 global best practice; and

– significant exposure to UBS shares through equity-based awards serves to align senior executive and shareholder interests.

Annual total compensation is competitively positioned and UBS places 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 UBS's integrated business strategy. In addition, the Compensation Committee verifies whether the senior executive fulfilled their objectives and key performance indicators (KPIs), including 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 corporate 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 (average of last three years) 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 honored 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.

Employment agreements and contractual payments

The Compensation Committee regularly reviews the individual employment agreements of senior executives. To protect UBS's franchise and competitive position, these contracts provide for a general 12-month notice period, in compliance with leading corporate governance guidelines and international best-practice procedures. During the notice period, the senior executive is generally prohibited from working in any competitive position in the financial services industry and from soliciting UBS staff or clients. In recognition of these restrictions, the senior executive is entitled to receive base salary, pro rata incentive and certain employment benefits until expiry of the notice period, unless the senior executive has been terminated for cause.

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

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

Pay-for-performance

Performance is the primary driver of compensation decisions. UBS is committed to providing superior compensation in return for superior performance and continually develops the benchmarks and processes that support informed compensation decision-making.

At the beginning of the year, each UBS senior executive agrees individual objectives and KPIs. Individual objectives focus on clients, economics, technical expertise, leadership, cross-business cooperation, strategic impact, risk management and personal contribution. KPIs vary by business and by individual and 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 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 that 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 may be highly variable from year-to-year.

Elements of compensation

The total compensation framework for senior executives comprises four elements: base salary, annual incentive, discretionary stock option awards and benefits.

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. (The amount is subject to the discretion of the Compensation Committee). Wherever practical, senior executives receive actual UBS shares with the same rights as ordinary shareholders. Shares are denominated either in Swiss francs or US dollars 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 recognizing individual contributions to Group and business group performance, exceptional contribution to cross-business cooperation and integration, outstanding achievement, personal performance or commitment to UBS, outstanding professional and technical expertise and Group-wide strategic leadership skills and potential.

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

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, subject to continued employment. 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.

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Key elements for decision-making process within the Compensation Committee

Actual process and decisions taken

The Compensation Committee makes decisions on individual senior executive compensation based on:

– Group and business group performance;

– 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 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).

Determination of 2007 incentive targets

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

1) 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;

2) 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

3) 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%.

Further information is included in the section "Highest total compensation for a Group Executive Board member".

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.

Performance factors used to determine 2007 senior executive compensation

The 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.

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Actual 2007 compensation for members of the Board of Directors and the Group Executive Board

Actual 2007 compensation for members of the Board of Directors

Compensation of the Chairman of the Board of Directors

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

As the Chairman of the BoD's incentive award is fully dependent on the Group's financial performance, the Compensation Committee decided against granting such an award in 2007.

Total compensation for Chairman of the BoD, Marcel Ospel, the highest-paid member of the BoD, amounted to CHF 2,568,379 for the 2007 financial year, a decrease of 90% over his total compensation in 2006.

Compensation for executive members of the Board of Directors

No incentive award was granted to the executive members of the BoD in 2007, since this award fully depends on the Group's financial performance.

Payments to non-executive members of the Board of Directors

The table on previous page shows remuneration for non-executive BoD members as from one annual general meeting date to the next, i.e. for the period 2007 / 2008.

Explanations:

– non-executive BoD members receive a base fee of CHF 325,000, including a fixed reimbursement of expenses which was previously paid separately;

– fees are paid 50% in cash and 50% in restricted UBS shares, however, members can elect to have 100% of their remuneration paid in restricted UBS shares (shares are attributed with a price discount of 15% and are restricted from sale for four years);

– 2007 shares valued at CHF 36.15 (average price of UBS shares on virt-x over the last ten trading days of February 2008), discount price CHF 30.75; and

– the non-executive chairmen and members of the Audit, Compensation, Nominating and Corporate Responsibility Committees receive additional retainers between CHF 100,000 and CHF 600,000 per mandate, commensurate with the associated workload.

Remuneration of non-executive directors is not dependent on the Group's financial performance, but is determined annually by executive members of the BoD, taking into account market practice in comparable global financial services and other relevant companies.

Actual 2007 compensation for members of the Group Executive Board

Changes in the composition of the GEB and restructuring of existing executive roles clearly impact the total compensation number disclosed for 2007 and should be taken into consideration in any year-on-year comparison. Marcel Rohner was appointed Group CEO with effect from 6 July 2007, while Raoul Weil became Chairman and CEO of Global Wealth Management & Business Banking on the same date. On 1 October 2007, Walter Stuerzinger was appointed Chief Operating Officer of Corporate Center, Marco Suter stepped down from the BoD to take up the position of Chief Financial Officer, and Joseph Scoby was appointed to the GEB as Group Chief Risk Officer.

Peter Wuffli relinquished his position as Group CEO on 6 July 2007, Clive Standish retired on 30 September 2007 and Huw Jenkins stepped down from the GEB on 30 September 2007; all three executives are contractually entitled to receive base salary, pro rata incentive and certain employment benefits until the expiry of their 12-month notice period. Huw Jenkins is retained in a consultancy position with UBS until 30 September 2008. The total amount due to all three executives - CHF 15.3 million payable in 2008 and CHF 45.3 million payable in 2009 - has been fully accrued in 2007 and reflected in the 2007 income statement. It reflects obligations earned under the repsective employment contracts.

For further information, see the "Employment agreements and contractual payments" section on page 27.

Highest total compensation for a Group Executive Board member

Total compensation for the highest-paid member of the GEB, Rory Tapner, amounted to CHF 10,306,920. He joined the GEB on 1 January 2006 as Chairman and CEO, Asia Pacific. In reaching their decision on his compensation, the Chairman of the BoD and the Compensation Committee took into account his achievements against financial and profitability targets for the Asia Pacific region, and his performance against his personal objectives and key performance indicators for 2007.

Under Rory Tapner's leadership, UBS has become a dominant participant in the Asia Pacific financial sector. In 2007, UBS's businesses in Asia Pacific made a record contribution to the Group's global revenues. UBS is the pre-eminent wealth manager in the region and won a number of significant regional awards during 2007. The level of compensation awarded, which is appropriately positioned relative to key competitors in the region, reflects his exceptional ambassadorial skills, strong cross-business group leadership and cooperation and the unique skills needed to continue to grow UBS's substantial presence in Asia Pacific, while maintaining high standards of corporate governance and managing a complex risk profile.

Actual 2007 compensation for former members of the Board of Directors and Group Executive Board

Former executives of UBS and its predecessor banks benefit from the use of office space and administrative support, mostly in connection with mandates they continue to hold on behalf of, or in the interests of, UBS.

All relevant payments, including these benefits, to current and former members of the BoD and GEB and their related parties are listed in the above tables. UBS does not, as a matter of principle, make any severance payments.

No additional honorariums or remunerations were paid to any BoD or GEB members. 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.

Share and option ownership

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 in this report, a substantial part of the annual incentive award for senior executives is delivered in the form of mandatory restricted or deferred UBS shares. And, moreover, senior executives 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 purchased. The options cannot be exercised until three years after grant and may be forfeited under certain circumstances at termination.

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 annual incentive award). Holdings in UBS shares to be accumulated range from CHF 12 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.

Senior executives are not permitted to hedge or in any way transfer the risk of price movements of unvested UBS shares; they may however enter into specifically approved hedging strategies in order to protect against a general downturn in the financial industry, provided that no more than 10% of the base value of the underlying instrument is determined by reference to UBS shares. Breaching this policy may result in the forfeiture of any hedged award.

Although UBS does not require the return of compensation already paid, its share ownership policy (the highest in UBS's peer group) has essentially the same effect. Senior executives are required to hold UBS shares with an aggregate value of five times the amount of their average cash compensation for the last three years. This is generally more than 250% of his or her annual incentive. A 50% reduction in UBS's share price, for example, results in the loss of at least 125% of an annual incentive's value. Stock options are awarded with a 10% price hurdle and, currently, many of the awards of past years have no intrinsic value. In recent months, all senior executives have seen a decline in their personal wealth in line with the fall of the UBS share price. UBS believes that this provides management with a strong incentive to focus on returning UBS to its path of shareholder value creation.

Unvested shares and options as well as vested options are at risk of forfeiture in the event that a senior executive's employment is terminated.

Options can only be exercised to the extent that the UBS share price exceeds the option strike price between vesting date and expiry date. The value to the executive is limited to the excess of the UBS share price over the strike price.

Disclosure of management transactions

Since 1 July 2005, UBS has disclosed on a no-name basis all transactions by members of its BoD and GEB in the firm's shares, options and all types of financial instruments whose price is primarily influenced by UBS shares. In 2007, 12 sales with a total amount of CHF 23,566,123 and six purchases with a total amount of CHF 3,080,000 occurred.

UBS executives receive a majority of their compensation in UBS shares or options. For this reason, management transactions will, in general, see sales outweighing purchases. Blackout periods and synchronized dates for unblocking or vesting of shares or options granted as compensation may lead to transactions being concentrated in short periods.

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Loans

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 companies, members of the UBS BoD 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 BoD and the members of the GEB are granted loans, fixed advances and mortgages on the same terms and conditions as other employees, based on third-party conditions adjusted for reduced credit risk.

Loans and advances to non-executive BoD members and related parties are made on terms comparable to those prevailing at the time for transactions with non-affiliated persons.

Loans granted to companies related to seven non-executive BoD members amounted to CHF 681.3 million, including guarantees, contingent liabilities and unused committed credit facilities. For details see Note 31 in Financial Statements 2007.

Loans granted to former members of the Board of Directors and Group Executive Board

No loans have been granted to former members of the BoD or of the GEB or to their related parties at conditions not customary in the market. For this purpose, UBS considers loans granted under the terms available to UBS employees' to be at arm's length.