LONDON Credit Suisse (CSGN.VX) is preparing to offload more risk exposure to staff in its 2012 bonus giveaway but significantly fewer managers will be allowed to join the latest version of a scheme that has yielded stellar rewards in previous years.
Pioneered in 2008, Credit Suisse's ground-breaking asset-backed bonus schemes pay managers a portion of their bonuses in financial instruments whose value depends on the performance of risky assets that the bank is exposed to.
The creation of a new Credit Suisse scheme comes as banks bow to the demands of shareholders and regulators to move away from cash bonuses in favour of alternatives that are more aligned with the risks bankers are taking.
Two earlier schemes have helped the bank to transfer $17 billion (£10.58 billion) of troubled loans and derivatives off its balance sheet, improving its capital position since capital demands are directly related to the size of a bank's balance sheet.
The schemes have also allowed the bank to save about $1.4 billion on cash or share-based bonus payments.
Staff, who are not given a choice about how they receive their bonuses, can reap sizable rewards if the underlying assets do well and have already enjoyed massive paper profits on one of the schemes, though they can't get their money until 2016.
Sources at Credit Suisse told Reuters the bank was preparing to launch a new, slimmed-down scheme for 2012's year-end bonuses. Credit Suisse declined to give any information on the size of the scheme.
A spokesman for Credit Suisse confirmed the bank sent an email to eligible staff last week signalling the creation of a third scheme, to be called the 'Plus Bond'.
The scheme will be confined to managing directors and directors at the investment bank, he said. This suggests that the numbers of participants will be in the region of 2,000, as in the original 2008 'PAF 1' scheme which was also confined to investment banking staffers.
A 2011 version of the scheme, 'PAF 2', included senior staff from the Credit Suisse Group and had 5,500 participants; the Credit Suisse spokesman declined to comment on why the 2012 version was limited to investment bankers.
Further details of the Plus Bond, which will have a "similar" structure and composition to the 2011 scheme, will be announced to staff later in January, according to the spokesman.
For the 2011 scheme, a $12 billion pool of derivatives was taken out of Credit Suisse and put into a specially created vehicle.
Staff were given bonds that entitled them to regular interest payments of 5 to 6.5 percent, and would get a payout at the end of the scheme in lieu of their original bonus amount.
The value of their final payout depends on how the underlying assets perform; the first $500 million loss is borne by Credit Suisse and any further losses reduce the lump sum staff ultimately get.
Reports last summer claimed the value of the original PAF 1 notes had shot up by 80 percent. PAF 1 included troubled assets that were thinly traded in 2008 and hard to value. The surge in its value came as the price of other similar assets recovered from the lows of 2008 when PAF 1 was created.
Staff are not allowed to sell PAF notes, so their ultimate pay-off from PAF 1 will depend on the pool's value in 2016, but since many of the assets have already been sold some of the gains have been locked in.
The asset-backed schemes, which Credit Suisse chief executive Brady Dougan described in an email as "a risk transfer from the firm to employees", are part of a Credit Suisse bonus pool that also includes deferred shares in the bank and cash.
"We are trying to strike the right balance and align employees with shareholders," he said in the January 2012 message to affected staff. "These measures put us in a good place to perform well in 2012."
Credit Suisse's net income fell 58 percent, to 1.1 billion CHF ($1.2 billion), in the first nine months of 2012 while earnings per share fell 63 percent, but the bank still won praise from analysts for its progress in cutting costs.
Its shares have risen 35 percent in the last six months, against an average rise of 25 percent across the benchmark EuroStoxx 600 index of European banks over the same period.
No other bank has yet followed the PAF structure, with some banks telling Reuters they had concerns about whether the arrangement would hold up to regulatory scrutiny in their jurisdictions.
Some bankers also feel that the schemes would not be popular with shareholders since participants can get windfalls if the underlying assets do well, even though the performance of the underlying assets is linked to the overall economic climate and not the participants' performance.
Other banks are embracing cash alternatives including stock options and bonds, and cash bonuses are expected to fall this year [ID:nL5E8NV410].
While some bankers would prefer cash, the reality of working in a sector which has announced 160,000 job cuts since mid-2011 [ID:nL5E8MDASH] means executives are unlikely to jump ship in protest at bonus structures.
Deutsche Bank (DBKGn.DE) announced in October that it was creating an independent external panel to review compensation. The findings of the panel, which have not yet been made public, will "influence 2012 year-end compensation practices", a Deutsche Bank spokesman told Reuters.
Barclay's (BARC.L), which will announce the outcome of a sweeping operational review on February 12, may also make a statement on bonus structures at that point. A spokesman for Barclays declined to comment.