At the UBS annual general meeting to be held on 19 April 2006, shareholders will be asked to vote on two items on the agenda related to the bank’s compensation policy: the re-election of the Compensation Committee chairman, and the authority to issue conditional capital to service the stock options granted to senior executives and staff.
The decision whether or not to approve these two proposals must rely on an analysis of the compensation policy as a whole. It is interesting to note that UBS’s annual report is particularly transparent on the subject. It clearly states that it is up to the Compensation Committee to propose a system of compensation to the Board of Directors and to set senior executive pay conditions. The Committee’s chairman, Dr. Rolf A. Meyer, therefore plays a major role in this respect.
One characteristic of UBS’s compensation policy is that it heavily relies on stock option plans. At present, approximately 2.4% of the capital is distributed each year in the form of stock options. Over ten years, that amounts to one quarter of its total capital! In addition, this year UBS is requesting shareholder approval for an create a conditional capital equivalent to 7.1% of total capital for the conversion of the options granted over three years. When added to the capital reserved for options awarded in the past but not yet vested/exercised and to the restricted shares awarded, the total capital reserved for staff and senior executives corresponds to approx. 18% of issued capital. In terms of best practice, such a transfer of value is hard to justify to shareholders. The dilution for current shareholders due to the increase in conditional capital can therefore not be accepted.
Generally speaking, UBS senior executives are at present the highest paid in the European banking sector. This is because UBS’s compensation system is based on a peer group of nine comparable financial institutions, only two of which are European. It is no secret that American banks offer substantially higher remuneration than their European counterparts. In such a context, UBS could be expected to adopt the exemplary approach of the Dutch Bank ING and set up two peer groups. The first should be used to compare senior executives’ performance, while the second should be used to compare the level of pay. Half of the companies included in the second group are European banks; the other half are multinationals with their headquarters in the country – in other words, the types of firms with which the major banks often have to compete to recruit the best talent. Such a system would result in much more reasonable remuneration packages that would nevertheless be attractive for senior executives on the European and Swiss markets.
In light of the points raised above, Ethos is of the opinion that UBS’s compensation policy is outside the boundaries of European best practice. It consequently invites all UBS shareholders to vote:
AGAINST the increase in conditional capital set aside for stock option plans and equivalent to 7.1% of total capital (item 6 of the agenda).
In the context of the dialogue between UBS and Ethos, the Chairman of the compensation committee demonstrated an open and positive attitude regarding an advisory vote on the compensation policy at the 2007 annual meeting. However, Mr. Meyer made it clear that this personal point of view was conditional upon a positive legal advice and approval by the entire board which has the competence to make such decisions. Ethos commends this position and recommends to vote:
FOR the re-election of Mr. Rolf Meyer, chairman of the compensation committee (item 4.1.1 of the agenda).
