ON A DIFFERENT SHOT AT BONUSES

GOOD FOR THE GOOSE...

It's good to see a bank come up with an out-of-the-box to pay bonuses to it's employees that better balances the the long-term interests of it's shareholders with it's employees.  I'm referring to this story titled "Credit Suisse to use Illiquid Investments to pay bonuses" in the WSJ today:

"Credit Suisse Group said Thursday it will use up to $5 billion of its own illiquid assets such as mortgage securities to pay senior staff year-end bonuses at its investment bank, a move meant to spread risk more evenly between the bank and its employees.

The Zurich-based bank plans to pool commercial mortgage-backed securities and leveraged loans it can't sell because demand has seized up, then dole out units in the entity to managing directors and directors as part of this year's pay, according to a memo made available by a spokesman..."

"...The memo said that, with the introduction of PAF units, "a material block of legacy-risk positions will be removed from Credit Suisse's risk-weighted assets and this will also lead to a reduction in capital usage. This new compensation structure, therefore, helps to advance our strategy of reducing risk."

"The plan, the first of its kind among major Wall Street houses, puts focus squarely back to Credit Suisse's investment bankers, for whom the new system could potentially become lucrative.

However, some employees were said to be enraged at the idea, saying they could potentially incur losses if tax is levied on the book value of the assets."

There will undoubtedly be issues to be resolved with employees on how these could be made more palatable in some of the details.  At first glance, it does bring up Dickensian images of the kids being fed gruel.

But the logic behind them is pretty good especially since banks and investments banks have long paid half of more of an employee's bonus in the stock of the employer, to be held for a period of years before they vest.  And these securities have as good a shot to be a good investment as the stock of the bank.

As the article goes on to point out:

"The pool is seen by analysts as a savvy move to offload some risk to its employees, Bernstein Research analyst Dirk Hoffmann-Becking said.

"It's a clever move in my opinion because Credit Suisse gets a risk buffer, but the employees also have significant upside because the securities are massively undervalued," Hoffman-Becking said."

This is something that our banks here should probably take a look at, and perhaps start implementing as early as this year.