(Recasts lead, adds details on portfolio)
By Emma Thomasson and Dan Wilchins
ZURICH/NEW YORK Dec 18 Credit Suisse Group AG(CSGN.VX) will pay senior executive bonuses with troublesome, illiquid assets, forcing employees to take on the risk that at least some of them put on the Swiss bank's books.
The new plan will cut the bank's risk exposure by linking most of its top executives' bonus payouts to some $5 billion in illiquid and often opaque assets, which have tumbled in value amid the credit crisis.
The plan comes amid 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. Selling the assets in the open market would further depress their value and giving them to employees allows executives to benefit if the assets perform better than current market prices would imply.
The bank is considering allowing outside investors to invest in the pool, a person familiar with the matter said.
The memo, seen by Reuters, said investment bank managing directors and directors will receive 70 percent to 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." The rest of their bonus will be in cash that must be returned under some circumstances.
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."
The pool consists of assets such as loans funding leveraged buyouts, commercial mortgage backed securities, a person familiar with the matter said. No asset will account for more than 5 percent of the portfolio's value and instruments from Europe, Asia and the Americas will be included.
Credit Suisse is financing about 85 percent of the value of the portfolio, meaning employees and any outside investors would be on the hook for roughly the first 15 percent of losses. The portfolio will have fully matured in about eight years and the average life of the portfolio is a few years, the person said.
Traders say investors have looked more critically at Credit Suisse since October when the Swiss state bailed out rival UBS AG 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. (Additional reporting by Dan Wilchins in New York; Editing by David Cowell and Andre Grenon)
Our top photos from the past week.