Perhaps the Future Trend in Wall Street Bonuses:  Win-Win for Firm & Employees.

[ by Howard Haykin ]            

Credit Suisse is "going to the well" for a third time when it comes to providing bonuses for its top-level employees.  Hoping to replicate the successes experienced with the 2008 and 2011 bonus pools, Credit Suisse will use risky assets to fund the 2012 bonus pool for 2,000 of its top-level employees.  And once again, the assets will be taken from the firm's balance sheet and placed into a so-called Expanded Partner Asset Facility (EPAF) fund. 

Win-Win Situation, Hopefully.   The offloading of risky assets cleans up Credit Suisse's balance sheet.  The transfer also provides the affected employees with "some skin in the game", by forcing them to own some of the same volatile and risky assets that they had actively traded for the firm's accounts throughout the year.   The securities remain in the fund during the employees' vesting period.   If, as in the past, the securities appreciate in value, employees come out ahead.  Thus, a Win-Win situation.

It's expected that this year's pool will start out with at least $5 billion - about the same amount provided for 2008 bonuses.  Through its earlier schemes, PAF-1 and PAF-2, Credit Suisse successfully offloaded some $17 billion worth of risky assets. 

The process is being closely watched by Wall Street rivals - including Goldman Sachs, Morgan Stanley, Barclays, and UBS. 

Here’s How The "Plus Bond" Scheme Works.   First, the bank earmarks some of its risky, hard-to-value assets (almost always part of its trading assets) for transfer to an investment vehicle which will act as the employee bonus fund. In 2008 and 2011, the firm contributed assets valued at $5 billion for PAF-1 and $17 billion for PAF-2, respectively.  That cleaned out the Credit Suisse balance sheet and either appreciate or depreciate in value as part of the fund over a fixed time period. Assets in both the original schemes will be liquidated in 2016.

After determining the size of the bonus pool, Credit Suisse picks which employees will participate. In 2008, there were 2,000 participants;  in 2011, there were 5,500 participants. For 2012, it's expected that 2,000 investment banking employees at the level of managing director and director will participate.   At the end of the lock-in period, all the assets will be liquidated and the cash raised will be distributed among the participating employees. 

Credit Suisse not only benefits by ...  cleaning up its balance sheet, taking it closer to the stringent capital requirement imposed by Swiss regulators, but and it also reduces employee compensation expenses by making the asset-based bonus part of compensation along with cash and stock.  The bank reportedly has saved $1.4 billion on compensation costs through its first 2 schemes - something that will clearly show as an improvement in operating margins for its investment banking business.

As for employees, the bonus, although risky, ...  represents a potential to take home more money than they can get through a regular stock based bonus payout. PAF-1 appreciated in value by almost 80% between 2008 and 2012 - all that gain goes to employees. And they obviously expect the newly setup scheme to also bring in similar returns.

For further details, go to [The Motley Fool via Trefis, 1/4/13].