An eye-catching idea if ever we saw one – make IB directors eat what they’ve cooked.
As Bloomberg reported earlier on Thursday, Credit Suisse has found a new way to reduce the risk of losses on about $5bn of illiquid debt: using them to pay senior employees’ year-end bonuses.
Here are the relevant extracts from a memo signed by chief executive Brady Dougan and Paul Calello, the head of the investment bank:
Deferred ISU and PAF units as part of variable compensation
The amount of deferred equity compensation, as last year, will continue to be determined based on the level of variable compensation awarded, irrespective of title. Only employees with a corporate title of ANL (Analysts) are not participants in the Credit Suisse Group Master Share Plan (“the Share Plan”). For all other employees, participation in the Share Plan will begin if and when the employee’s variable compensation equals or exceeds CHF 125,000 (or the local currency equivalent).
The equity portions of variable compensation for 2008 will be determined on the same basis as for 2007.
The equity component of annual variable compensation will be awarded under the Share Plan, as Incentive Share Units (ISUs) or in the form of Partner Asset Facility (PAF) units, a new equity-linked award described below.
New Award Form: Partner Asset Facility (PAF) units
Partner Asset Facility (PAF) units are a new form of award that compensates employees with an equity-interest in assets that originated in the Investment Banking division. The PAF units will be linked to the performance of a pool of illiquid assets.
Deferred variable compensation awards will be delivered as follows:
Investment Banking Managing Directors and Directors will receive 70% -80% of their deferral in the form of PAF units and the balance in the form of ISUs. All other employees will receive 100% of their deferred variable compensation in the form of ISUs.
PAF units vesting, delivery and cash payments
At the date of grant, 60% of PAF units will be vested. The balance will vest on March 31, 2009. All PAF units remain subject to non-compete/non-solicit provisions that expire ratably over the three years following the date of grant.
Cash distributions will not be made for several years, although participants will be paid interest at LIBOR plus 250 basis points on the initial award value semi-annually.
Cash payments representing distributions of a portion of the award may be made to participants in the future contingent upon the performance of the underlying assets, with annual payments anticipated following the fifth anniversary of the grant date.
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