How to Give a Bonus

What sort of bonus should a financial organization whose earnings have been trashed this year due to holding a lot of bad paper give to top managers? Credit Suisse has hit upon an ingenious approach:

Dec. 18 (Bloomberg) — Credit Suisse Group AG’s investment bank has found a new way to reduce the risk of losses from about $5 billion of its most illiquid loans and bonds: using them to pay employees’ year-end bonuses.

The bank will use leveraged loans and commercial mortgage- backed debt, some of the securities blamed for generating the worst financial crisis since the Great Depression, to fund executive compensation packages, people familiar with the matter said. The new policy applies only to managing directors and directors, the two most senior ranks at the Zurich-based company, according to a memo sent to employees today.

“While the solution we have come up with may not be ideal for everyone, we believe it strikes the appropriate balance among the interests of our employees, shareholders and regulators and helps position us well for 2009,” Chief Executive Officer Brady Dougan and Paul Calello, CEO of the investment bank, said in the memo.

Hat tip: Jonathan Adler

A lot of U. S. companies in a similar situation could do worse than to emulate CS.

Update

The beauty of the CS idea is that nobody knows how to value these assets. If their proper value is low, when you give them to top management it’s what they deserve. If their proper value is high, when you give them to top management it’s what they deserve. It’s perfect.

7 comments… add one
  • Tom Strong

    Bravo! I love it.

  • ZF

    As so often, there are problems.

    The bank will now have to compete with its own employees finding buyers for these assets. How’s that likely to work out, do you think? Conflict of interest, anyone?

    Also, the more rapidly the employees sell these things off at fire sale prices the more of the bank’s capital will be destroyed, as they have to mark the ones they still have on their balance sheet ‘to market’.

    Otherwise, it’s a great plan…

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