• Our foremost priority is to encourage and reward behavior that contributes to sustainable profitability and therefore the long-term success of our firm.

• In order to align employee incentives with the interests of our shareholders, we pay a significant part of our employees’ variable compensation in the form of deferred awards, mostly in UBS shares, which are subject to strict forfeiture rules.
  

In making UBS’s compensation decisions for 2010, the Board of Directors (BoD) and the Group Executive Board (GEB) have carefully balanced all the relevant factors such as our improved business performance, industry compensation trends and regulatory requirements. From a shareholder’s perspective, it is essential to weigh the short-term potential for raising profitability against the long-term requirement to retain and attract key staff. Although our financial performance in 2010 was markedly better than in 2009, with an increase in profitability of CHF 10 billion, given the considerations outlined above, the bonus pool for 2010 was set at CHF 4,245 million, 11% lower than it was last year.

At least 76% of a GEB member’s bonus, including 60% in equity (under the Performance Equity Plan [PEP] and the Senior Executive Equity Ownership Plan [SEEOP]), is deferred and at risk of forfeiture for periods of up to five years. Moreover, the vest-ing of these awards is subject to the fulfillment of specific performance conditions. A maximum of 24% in cash (under the Cash Balance Plan [CBP]) is paid out immediately, subject to a cap of CHF / USD 2 million.

Sixty percent bonus deferrals – Above a total compensation (that is, base salary and bonus) of CHF / USD 250,000, all employees receive at least 60% of their bonus in shares deferred over three years under the Equity Ownership Plan (EOP). In addition, a number of employees in the Investment Bank are subject to additional cash deferrals under the Deferred Cash Plan (DCP). All deferred awards are subject to strict provisions that enable the bank to reduce or forfeit awards if an employee behaves in a way that contributes or leads to financial, reputational or other harm to UBS.

Performance condition for equity awards – Like the vesting of equity awards to GEB members, the vesting of equity awards to certain categories of employees is subject to the fulfilment of specific performance conditions. This group comprises key risk-takers and controllers, around 200 individuals who can materially commit or control the bank’s resources and / or exert significant influence over its risk profile. Group Managing Directors and employees with total annual bonuses exceeding CHF / USD 2 million are also subject to this requirement. Deferred awards granted to employees in these categories will only vest in full if the employee’s business division is profitable. In the case of Corporate Center employees, they will only vest in full if the Group as a whole is profitable.

Reduction of leverage – The use of leverage in equity awards has been significantly reduced for all GEB members, and eliminated for all remaining employees, with the discontinuation of the Incentive Performance Plan (IPP), a one-time equity plan.

Shareholders’ advisory vote – UBS shareholders will once again have the opportunity to express their views on UBS’s compensation decisions in a non-binding vote on the Compensation Report at UBS’s Annual General Meeting in April 2011.