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UPDATE 1-UBS cuts investment bank bonuses 80 pct, no cash

(Adds detail, background)

NEW YORK, Jan 29 (Reuters) - UBS AG UBSN.VX, which agreed to change its compensation practices when it received a Swiss government bailout last fall, on Thursday confirmed it is slashing bonuses for its investment bank by more than 80 percent.

Moreover, bonuses for the investment bank’s highest ranking executives -- executive directors and managing directors -- would be paid out entirely in deferred shares and zero cash, people familiar with the situation told Reuters.

Deferred compensation will be distributed in three annual installments, each of which may be canceled in any year the bank reports a loss, the sources said.

UBS declined to comment, except to confirm a Swiss government spokesman who earlier Thursday said: “2008 variable compensation will be reduced by over 80 percent. A part of those payments is derived from working contracts; others include further variable remuneration components. The definitive numbers are still being worked out.”

Based on the roughly 10 billion Swiss francs in cash and stock bonuses paid out last year, UBS would pay less than 2 billion Swiss francs. Out of that pool, roughly 1.3 billion francs are to be paid out under the terms of preexisting employment contracts, the sources told Reuters.

UBS, hobbled by $49 billion of losses on subprime mortgage securities and other assets during the past two years, received a $5.2 billion capital injection from the Swiss government on Oct. 16. Switzerland took a nearly 10 percent stake in UBS.

At the time UBS said it would amend its pay practices, including provisions for letting it claw back payments if the actions of individuals subsequently hurt the bank.

The bonus cuts do not apply to employees of UBS’ wealth management businesses.

RADICAL CHANGES UNDERWAY

Last week UBS announced “radical” changes to its fixed income trading business, the primary source of the bank’s losses thanks to an untimely expansion into subprime mortgages, collateralized debt obligations and other assets that became almost impossible to trade by the middle of 2007.

The bank, under division chief Jerker Johansson, has already exited the municipal bonds, structured debt and most commodities business as well as proprietary trading. UBS says it remains committed to client-driven debt, currency and interest rates trading.

UBS has shaken up its capital markets management ranks, announced plans to slash its exposure to capital intensive businesses and cut thousands of jobs.

From peak employment of about 25,000 people in 2006, UBS’s investment bank headcount fell to 22,666 in the third quarter last year and plunged to 18,901 at the end of September.

The retrenchment and bonus changes have not been received well by UBS employees, sources at the bank tell Reuters.

And in a development that may be related, sources at the bank said UBS’s U.S. head of fixed-income distribution Jon Bass resigned on Wednesday. Bass, who one source said left to a standing ovation, is the latest in a series of departures form the bank’s bond business.

Wall Street banks have been under pressure for paying bonuses in a year when crumbling markets have dragged the U.S. economy into recession. At the same time taxpayers and lawmakers are up in arms that government bailout funds may be used to enrich bankers and traders they blame for causing the mess in the first place.

UBS shares sank 10 percent Thursday amid market talk the bank had suffered a 1 billion franc ($865 million) loss from fourth quarter trading. UBS declined to comment on its fourth quarter results, which are to be announced on Feb 10.

(Additional reporting by Kristina Cooke, Lisa Jucca, Sam Cage and Jason Rhodes; Editing by Bernard Orr)

$1 = 1.156 Swiss Francs

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