HONG KONG/SYDNEY (Reuters) - UBS has extended for up to two years a unique deal to protect its top Australian bankers' bonus pool to keep head-hunters at bay and remain the dominant force in the local investment banking sector, two sources with direct knowledge of the matter said.
The extension is meant to protect the firm's top-ranked Australian franchise, though it may infuriate other parts of Switzerland's biggest bank that are getting hit with lower pay and rile shareholder groups pressing for compensation reform.
Bonuses often make up the majority of pay for senior investment bankers, with managing directors at most major Western banks usually in line to make around $1 million or more a year. Luring away key bankers by rivals is a common industry practice and can cause damage to a franchise, as those individuals bring fee-paying clients with them.
Since the 2008 financial crisis, banks have come under pressure to revise compensation terms that drew the ire of the public and politicians. But for UBS, losing key bankers in Australia over pay was deemed potentially dangerous, as the business generates significant revenues in a key Asia-Pacific market -- the envy of even rivals such as Goldman Sachs, according to banking sources.
Sources say the latest UBS bonus protection plan involves nearly a dozen managing director-level leaders who hold the key to relationships with customers in Asia-Pacific's sixth-largest economy. Clients include billionaire James Packer, Seven Network magnate Kerry Stokes, Commonwealth Bank of Australia, Telstra and fund manager AMP.
Bankers whose bonuses are ring-fenced include Guy Fowler, head of investment banking; David Di Pilla, co-head of the industrials group; Anthony Sweetman, head of corporate advisory; capital markets co-heads Barry Sharkey and Dane Fitzgibbon; and Simon Cox, head of equity capital markets, said the sources, who didn't want to be identified as the bonus deal is not public.
The deal excludes Australia-based Matthew Grounds, who was a key negotiator for the bonus arrangement but who now has a global role as co-head of investment banking.
A UBS spokeswoman declined to comment on the story, saying the bank does not comment publicly on individual compensation.
Cox, Sweetman, Sharkey and Fitzgibbon said by phone that they would not comment on the deal. Fowler and Di Pilla could not be immediately reached by phone and did not reply to emails seeking comment.
The bonus protection deal began in 2008 when the bank rolled back pay across the globe, though UBS realized it would have a problem in Australia if key bankers left for more money at rivals in the tight-knit, fee-heavy local market.
Australia is particularly sensitive to poaching because it's a large, developed, local market that is hard to break into, unlike other parts of Asia that are growing fast.
Grounds, who headed the Australia team at that time, felt that keeping the Australia unit intact was crucial amid a post-crisis atmosphere of widescale talent poaching, sources with direct knowledge of the matter told Reuters in December. The 2008 protection deal expired at the end of last year.
The latest bonus deal is similar to the 2008 scheme, where UBS let the Australia unit allocate a certain percentage of its revenue stream to year-end pay, the sources said. Annual country revenues and bonus pools are normally kept separate.
"This is obviously a way of retaining key personnel," said Mark Enticott, managing director at recruitment firm Ambition in Hong Kong. "But it's not a common practice in the industry."
UBS's Australian investment banking division has more than 150 staff, compared with more than 7,600 in the bank's entire Asia-Pacific operations. The division has proven to be a standout performer in the region, while UBS revenues elsewhere have shrunk.
UBS sits atop the ThomsonReuters/Freeman Consulting Co investment bank league table for Australia so far in 2012, with estimated fees of $75 million. It topped the league table over the past two years as well, netting $294.6 million and $221.5 million respectively, in estimated fees, according to the data.
So far in 2012, UBS is the leading dealmaker in Australia in a down year for activity, with mandates including a $3 billion planned float of the Australian unit of Hong-Kong listed CLP Holdings, Packer's $2 billion sale of media interests to Rupert Murdoch's News Corp, and a plan by Nathan Tinkler to take Whitehaven Coal private for more than $5 billion.
Globally, UBS slashed its 2011 bonus pool by 40 percent to 2.57 billion Swiss francs ($2.6 billion) and said total bonuses will fall by 60 percent in the investment bank after a $2.3 billion rogue trading scandal that triggered the CEO's resignation last September.
Earlier this year, Swiss shareholder groups Ethos and Actares urged UBS shareholders to vote down what they saw as excessive pay packages at the bank, drawing support from far larger numbers than is common in Switzerland.
$1 = 0.9856 Swiss francs