* Ermotti's pay up 21 pct to $12.3 million
* Highest earner is investment bank chief Andrea Orcel
* Investigating precious metal business alongside forex
* Rapped by Hong Kong in interest-rate probe
By Katharina Bart
ZURICH, March 14 (Reuters) - UBS hiked Chief Executive Sergio Ermotti's pay by more than a fifth last year, when the Swiss bank added probes into its precious metals trading and foreign exchange businesses to a long list of legal troubles.
Switzerland's largest bank published details of Ermotti's 10.73 million Swiss franc ($12.30 million) pay package on Friday, the same day that Hong Kong's regulator rapped the bank for compliance failures over how it estimated the city's benchmark lending rate.
UBS is grappling with the fallout from several major investigations, after paying $1.5 billion to global regulators in 2012 to settle allegations of interest-rate rigging.
The bank revealed in its annual report on Friday that it has widened an internal probe of its foreign exchange operations to include precious metals trading.
UBS is among a handful of large banks that global regulators are investigating over alleged rigging in the $5 trillion-a-day foreign currency market.
Ermotti, who on Thursday said European banks are more concerned about being "too small to survive" than "too big to fail" due to the challenges they face from holding more capital and increased competition and costs, is still dealing with UBS's past mistakes.
Knight Vinke, an activist investor which has called for UBS to hive off its investment bank because it says it threatens the lucrative private banking business, seized on the latest regulatory censure.
"Today's news from Hong Kong underscores once again how the complexity and size of organisations such as UBS make it all but impossible to manage risk effectively," Knight Vinke Vice Chairman David Trenchard wrote in an email to Reuters.
"This is particularly true of investment banking and is a point which appears to have been implicitly acknowledged by FINMA (Switzerland's financial regulator) when it required UBS to increase its capital reserves for risks related to litigation."
The regulator last year ordered UBS to hold 22.5 billion francs of extra reserves against litigation, compliance and other operational risk
In 2012, UBS responded to rising capital requirements by saying it would withdraw from large parts of fixed income which absorb valuable capital, part of a three-year plan to cut 10,000 jobs and rely almost solely on its flagship private bank for profits.
SWISS PAY CURBS
Executive pay, a closely watched topic in Switzerland after voters last year backed some of the world's strictest controls, comes under particular scrutiny at UBS because taxpayers funded a 6 billion franc bailout of the Swiss bank in 2008.
Ermotti's pay rose nearly 21 percent last year, during which UBS's share price rose 14 percent and the bank increased its payout to shareholders by two-thirds.
But UBS's highest-paid executive was investment banking chief Andrea Orcel, who earned 11.43 million francs. Chairman Axel Weber was paid nearly 6.1 million francs.
Swiss shareholder groups and union representatives, who are using pay as political leverage ahead of a May 18 vote to introduce a minimum wage, criticised UBS's awards.
"This is a scandal," said Pepo Hofstetter of Swiss union Unia. "It shows how important it is to introduce a minimum wage, so that the lower income bracket can also benefit."
Swiss businesses and the government have both recommended voters reject the minimum wage of 22 Swiss francs ($25.21) an hour, saying it would threaten jobs and even the existence of smaller firms.
In a ten-page chapter of the annual report detailing its legal woes, UBS said it "has taken and will take appropriate action with respect to certain personnel" as a result of its review of forex and precious metals trading.
Other problems include rigging of the Libor benchmark interest rate, claims it misrepresented mortgage-backed bonds during the U.S. housing bubble and back taxes due to Brazil dating back to when the Swiss lender owned an investment bank in the country.
The bank said "a number of authorities" were reported to be investigating suspected manipulation in the precious metals market, without elaborating.
Regulators including Germany's Bafin are looking more closely at how banks set benchmarks such as the gold fix after the Libor rigging scandal exposed widespread interest-rate manipulation.