We hear a lot these days about the need to get more creative in terms of aligning the interests of employees and shareholders.That usually means stock options and restricted stock grants, which may or may not be truly aligning interests.

Credit Suisse has been among the banks most willing to tinker in this area. Two years ago, for example, it tied bonuses to the bank's return on equity through 2014, with the total ROE over that span set as the maximum cash award’ it approved tough clawbacks. It also it required that 2.5 percent of bonuses be given to charities.

Now the Swiss banking giant has returned to an idea it pioneered several years ago: Using beaten-down assets as part of pay packages. Back in 2008, recall that it used CDOs as part of banker bonuses. The Financial Times notes those payments have performed well, with a 70 percent increase so far. Buoyed by that success, the bank is aiming to innovate even more. It has created a structured note that will be used to pay bonuses.

“The new structure, known as PAF2, does not contain the same potential for gains as its predecessor. It is a fixed-income product, which pays a coupon of 5-6.5 per cent over nine years. The bank has the option to cancel it after four years. The cash flow for the note comes from derivatives on some 800 ‘names’ in the bank’s portfolio. In the event of a default by one of these companies or countries, the value of the note’s portfolio declines, but the bank would absorbed the first $500m of losses.”

To be sure, the upside  is limited. But experts have extolled the virtues of paying bonuses in fixed-income products for years. This makes sense, and we may see other banks tinker in this way. Barclays not too long ago used COCOs as part of compensation.

For more:
- here’s the article

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