UPDATE 2-UBS to align bonuses with business performance

* UBS to raise portion of fixed-salary compensation

* Bonuses to be based on sustainable profitability

* To change pay only when key businesses profitable

* Will offer market-competitive pay in 2009

(Adds more details from memo, analyst comments)

By Lisa Jucca

ZURICH, Oct 27 (Reuters) - UBS AG (UBSN.VX)(UBS.N) plans to reform its pay structure by hiking fixed salaries and matching bonuses to sustainable performance, but won't implement the changes until key units return to profit, an internal memo said.

The Swiss bank had already overhauled its compensation system at the end of 2008 after the Swiss government rescued it from the subprime crisis with a cash injection.

The internal memo released to UBS staff on Oct. 5 showed the bank now plans to go further to meet regulatory demands in Switzerland and internationally.

"At UBS, the ratio of variable to fixed compensation was in some cases particularly high," the memo said.

"Fixed salaries at UBS should, in the future, be high enough that the variable portion can be adjusted from year to year, while still ensuring that the total compensation is in line with market standards."

Swiss competitor Credit Suisse Group AG (CSGN.VX) announced a review of its compensation structure last week, making it the first major global bank to meet G20 standards. [ID:N20433456]

UBS said bonuses would in future be based on the profitability of each division after deducting capital costs. Other indicators, such as revenue quality and the market position of the division, will also be taken into account.

"We can only fully implement this system, however, when our most important businesses return to profitability," UBS said. "For compensation decisions for the transition year 2009, our general approach is to offer market-competitive compensation in all divisions."

COMPENSATION STILL HIGH