ZURICH Swiss bank Credit Suisse CSGN.VX will link payouts for its top investment bankers to illiquid assets in an innovative new bonus system that may set an example for others in the industry.
The new system will cut the bank's risk exposure by linking bonus payouts for 2,000 investment bankers to some $5 billion in illiquid and often opaque assets, which have tumbled in value and been blamed for deepening the credit crisis.
The plan -- which links the bonus of bankers to the risks of the assets and takes risky assets off the balance sheet -- comes amidst fierce criticism that bonus systems were rewarding bankers for taking on irresponsible risks.
"While the solution we have come up with may not be ideal for everyone, we believe it strikes the appropriate balance among the interests of our employees, shareholders and regulators and helps position us well for 2009," a memo from CEO Brady Dougan and investment bank boss Paul Calello said.
Credit Suisse appears to be the first to use tarnished assets to pay employees, linking their rewards to the performance of risky assets they sell to investors.
The memo, seen by Reuters, said investment bank managing directors and directors will receive 70-80 percent of their deferred equity compensation in so-called partner asset facility (PAF) units that "will be linked to the performance of a pool of illiquid assets."
Credit Suisse said earlier this month it was cutting 11 percent of its workforce, or 5,300 jobs, as it revealed it made a net loss of about 3 billion Swiss francs ($2.5 billion) in October and November.
The bank said the loss, primarily in investment banking, where most of the job cuts will fall, was due to adverse market conditions and to the cost of reducing risk.
Directors in the investment banking division may also have to hand back part of any cash bonus in subsequent years.
The memo said the cash retention award "will be subject to repayment of the award in the event that a claw back event occurs, such as voluntary termination of employment."
Traders say investors have looked more critically at Credit Suisse since October when the Swiss state bailed out rival UBS UBSN.VX, which has made more writedowns than any other European bank.
Echoing a similar move at UBS, Credit Suisse has also said that, given its performance to date, "it would not be appropriate" for its chairman, its chief executive officer and the head of its investment bank to receive bonuses for 2008.
(Reporting by Emma Thomasson; Editing by David Cowell)