Credit Suisse, one of the biggest investment banks in London, is set to pay its bankers bonuses in the risky debt they helped create, in a scheme that could reignite controversy over pay in the finance sector.
Earlier versions of the deal, which is understood to have secured approval from the Financial Services Authority, have generated substantial windfalls for bankers because the supposedly "toxic" assets have performed far better than expected.
The new offer is thought to involve around 2,000 senior investment bankers with the rank of director or managing director, many of whom work at the bank's Canary Wharf HQ.
Called Plus Bond, it is expected to closely resemble the second version known as PAF 2, which saw the bank shifting a $12bn (£7bn) portfolio of derivatives into a specially created vehicle for top bankers. Staff were given bonds that entitled them to generous interest payments of up to 6.5 per cent with a payout at the end of the scheme in lieu of their original bonus amount. The value of that final payout depends on how the underlying assets perform but if there are losses the first $500m are borne by Credit Suisse.
The first scheme, known as PAF 1 and set up in 2008, is likely to shower bankers with riches. The $5bn pool was made up of thinly traded assets which have recovered sharply in value since the financial crisis. PAF 1 notes have reportedly shot up in value by 80 per cent.
While final payouts depend on the value of the assets in 2016, some have been sold, locking in gains.
PAF 2 in 2011 saw the bank shifting $12bn of assets from its own balance sheet into a specially created fund for 5,500 bankers. Final details of the third scheme are set to be revealed to staff some time this month.
But the previous schemes have saved Credit Suisse around $1.4bn in cash or share-based bonuses.
FSA rules require bonus schemes for top managers and those charged with "risk" functions, such as traders, desk heads and supervisors, to have a substantial part of their bonus deferred and made subject to clawback if the bank or their part of it performs poorly. The watchdog is understood to have told banks that any scheme like this must not be used as a way to get around the rules, but is thought to have okayed Credit Suisse's proposal for Plus Bond.
A spokesman for the bank insisted any outperformance by the assets in the scheme, beyond the generous interest payments, would be retained by the bank's shareholder this time.
A survey of several investment banks by The Independent found no plans to do anything similar. Other banks have used bonds in lieu of bonuses, but they function much more like standard corporate bonds and are therefore more closely aligned to the performance of the bank.
One banker said: "We would question how this would work. It would seem to be linked to underlying economic performance rather than the performance of the bank. Because of that we would wonder what shareholders would feel about it."
"We are trying to strike the right balance and align employees with shareholders," Credit Suisse chief executive Brady Dougan wrote in a memo to staff when he launched the 2011 scheme. It's "a risk transfer from the firm to employees", he explained, adding: "This is an at-risk investment but our best estimation from actual experience is that this will pay its interest and principal in full."
Credit Suisse declined to say why this year's Plus Bond will be restricted to so many fewer staff than PAF 2.
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