Senior executives and traders at UBS will forfeit previously earned bonuses if they underperform, under a radical new pay system devised by the stricken Swiss bank.

Just as bonuses (Latin for “good”) are paid out for good performance, maluses (“bad”) will be meted out if the bank subsequently makes losses or if the employee misses performance targets, UBS said. The maluses could wipe out all previously agreed share bonuses and two thirds of all cash bonuses under stringent new rules designed to align the interests of executives and traders with those of shareholders.

The Swiss bank announced plans for a complete overhaul of its pay system and disclosed that it was taking legal advice to see whether it could claw back previously paid bonuses from tarnished executives. That raises the prospect of UBS demanding and, if necessary, suing Marcel Ospel, its former executive chairman, for the return of millions of dollars of bonuses that he received before UBS collapsed into losses.

Maluses will be awarded for financial losses at group or divisional level, for asset writedowns, for personal misconduct, for breaches of risk rules and for missing performance targets. A worker receiving a malus will forfeit previously awarded cash and/or share bonuses held in ringfenced accounts. Both cash and share bonuses will be held in ringfenced accounts for up to five years. Executives underperforming repeatedly could be given so many malusus that they could end up with a negative balance, UBS said.

UBS blames poorly designed bonuses for reckless risk-taking by a relatively small number of its proprietary traders for toppling the bank into losses of about SwFr45 billion (£25 billion) over the past year.

The new compensation rules are designed to alter the culture at UBS. “Monetary incentives will continue to have a clear place in it, but they cannot run counter to UBS corporate objectives nor endanger the reputation of the bank,” Peter Kurer, the chairman, said.

UBS, which built up in Britain out of the old SG Warburg, is one of the biggest investment banks in the City of London. The new rules will apply to about 2,000 of the most senior executives and “risk-takers” in the group. However, they will not apply to corporate advisers in mergers and acquisitions because they take no balance sheet risk.

UBS is reforming bonuses under pressure from the Swiss Federal Banking Commission. Last month the bank was rescued with a $60 billion (£40 billion) bailout package by the Swiss Government. All 2008 bonuses will be down from 2007 levels, UBS said.

Fresh details of the bonus carve-up at Goldman Sachs emerged yesterday, with the bank understood to be introducing a “progressive” system of payments so that the most junior staff will endure the smallest bonus reductions. The seven most senior executives have said that they will take no bonus this year.

The bonus pool could be shrunk at the last moment. In the first three quarters of the year, Goldman staff had accrued a bonus pool of $11.4 billion, down 32 per cent on the same period last year. Senior Deutsche Bank executives have waived their rights to 2008 bonuses.

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