A unique deal to protect part of the annual bonus pool at UBS Australia expires within weeks, say sources with direct knowledge of the matter, raising the prospect that the business may lose some top talent should it not be renewed.

Rivals in Asia's fifth-largest economy may be tempted to poach a group of the best bankers from the Swiss financial house or look to buy the local business as a whole if the agreement is allowed to lapse, the sources say.

UBS declined to comment for this article.

"As we speak, the focus is on getting an acceptable deal," said one UBS banker, who did not want to be named because of the sensitivity of the issue. Another senior UBS banker, who also asked not to be identified, confirmed that staff are trying to get a new deal with the parent bank.

UBS is a dominant force in Australia's investment-banking market, consistently among the top rankings for equity capital market underwriting, mergers-and-acquisitions advisory, and stockbroking in at least the last five years, according to Thomson Reuters data. Year to date, it is No.1 in equity capital market underwriting and No.2 in M&A advisory behind Goldman Sachs Group Inc., its chief rival in Australia, the data show.

UBS earned an estimated $276 million in fees from handling equity offerings and M&A deals in Australia in the January-September period, according to Thomson Reuters/Freeman & Co., the highest estimated total among the country's investment banks.

The bank counts top telecommunications firm Telstra, Commonwealth Bank of Australia, Leighton Holdings, and billionaires Kerry Stokes and James Packer among its prized Australia clients.

Bargaining Power

While banking groups worldwide are under pressure from the European debt crisis and an economic slowdown, there is added scrutiny on the UBS Australia business given the implications of the looming deadline for its three-year pay agreement.

"I think bargaining power has declined enormously in recent years. And it's going to stay that way for some time," said Ian Ramsay, professor of corporate law at the University of Melbourne and a former corporate attorney who worked closely with banks on Australia deals.

"But when the key players sit around, there will be some good reasons to put on the table for extending the deal, or at least parts of it, because of the strengths of UBS's Australian operations compared to some of its international operations."

After the 2008 financial crisis, UBS Australia worked out an arrangement that allowed the division to protect part of its bonus pool from the rest of the bank, according to the sources.

UBS units across the world were no doubt making the case to be immune from pay cuts that year, but the Australia business stood out.

It was the top equity underwriter, top M&A adviser, and top stockbroker in Australia in 2008, according to Thomson Reuters data. Australia is not the easiest market to break into, as relatively few banks are active there, so any disruption risked losing the dominance of that franchise. While smaller than the greater China market, Australia still has a steady fee stream.

Proceeds raised from Australian equity and equity-related offerings in the January-September period totaled A$19.9 billion ($19.88 billion) from 458 deals, a 42.2 percent increase year on year. In the same period, Japan's equity proceeds were $17.7 billion, according to Thomson Reuters data.

When the global crisis hit, the Australian banking market sensed an impressive competitor could be vulnerable, fueling speculation that a rival or a local bank could march in and poach key staff or buy the entire group.

Matthew Grounds, UBS Australia's top banker, pushed forward the 2008 compensation agreement, knowing that key to keeping the Australian unit intact was protecting its bonus pool for that year and the years beyond, the sources said.

Protecting the bonus pool would help ensure top-performing employees would stay at the bank, and would help fend off any outside approach.

Under the terms of that deal, UBS agreed to let the Australia unit allocate a certain percentage of its revenue stream toward year-end pay, the sources say. Annual country revenues and bonus pools are normally kept separate at banks.

The revenue share allowed UBS Australia to buffer it from any broader compensation cuts. UBS and most other major investment banks dramatically cut pay in the 2008 pay cycle.

Restructuring

Precrisis, managing directors at most large investment banks could earn at least $1 million apiece, with salary capped at $250,000 and the rest in a bonus split between cash and stock.

UBS is currently going through a global restructuring, a move that will result in the bank shrinking its investment-banking operations. A $2.3 billion trading scandal earlier this year was a major blow and a catalyst for the move.

Three years on from the initial deal, the economic backdrop looks familiar.

Grounds, who is now joint global head of investment banking for UBS as well as CEO of the Australia and New Zealand business, has a broader remit. It's unclear whether or not that will help roll over the pay agreement.

(Additional reporting by Sonali Paul in Melbourne; Editing by Michael Flaherty and Ian Geoghegan)