Credit Suisse, due to report quarterly earnings next month, will pay staff bonuses in a note backed by derivatives to cut the cash component and protect its balance sheet, a report says.

Credit Suisse will pay employee bonuses with a structured note backed by derivatives, cutting the cash component of remuneration and strengthening the firm’s balance sheet as a result. 

“It is a very effective risk-reduction measure and the right thing to do in the current environment. It provides a healthy coupon, provides a long-term incentive, and it helps the firm achieve its strategic goals,” Brady Dougan said in a memo seen by this publication.

Dougan said of the structured note: "The
instrument has a stated 9 year maturity but has a call in 4 years. It
vests in March of 2012. It pays a coupon of 5 per cent for Swiss franc holders
and 6.5 per cent in dollars for holders elsewhere, but also carries some risk. The
risk comes from a diversified portfolio of derivative counterparty
risks. The principal (for both interest accrual and final redemption)
will be reduced by the cost of any defaults in the portfolio. The first
$500 million of losses in the portfolio will be borne by the equity
tranche which is owned by the firm. Losses beyond that, if any, would
reduce the principal value of the PAF2 units."

"PAF2
is a risk transfer from the firm to employees. The structure results in
a reduction in our risk profile, thereby helping to accelerate our
strategic goal of risk reduction and capital efficiency. PAF2 represents
an effective and real sharing of risk but, nonetheless, we still need
to reserve the right to amend this structure in the event of changing
requirements," Dougan said. 

It is unclear if private bankers will be affected by this policy, although given Credit Suisse’s “one bank” model under which investment bankers and wealth managers work closely together, it is probable, at least at first glance, that wealth managers will be treated as suggested in the memo.

As is usual at the start of a calendar year, there has been speculation about the size of bank bonuses and how, depending on their size, they will be paid. The issue is particularly sensitive for those firms that are supported by governments, as in the case of UK-listed banks such as Lloyds Banking Group and Royal Bank of Scotland, which owns Coutts, the private bank.

Yesterday, the UK government issued proposals on executive pay, saying that shareholders should get a binding vote on how firms manage pay; firms should require 75 per cent of shareholders to agree to any pay proposals. The recommendation is designed to appease public anger at big payouts to executives at companies seen to have performed poorly.

Switzerland's second-largest bank used a similar derivatives-based structure at the height of the crisis in 2008, paying bonuses from a $5 billion pool of collateralised debt obligations. Those payments have performed well, rising by 70 per cent in value up to today, Mr Dougan’s memo said.