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Illiquid incentives …

Bankers Win Big in Toxic Pay Plan –

Credit Suisse Group’s novel plan to pay bankers with a brew of its own toxic bonds and corporate loans has gotten off to an unexpectedly strong start, which could put further political pressure on other Wall Street firms to change how they pay their employees.

Late Wednesday, the bank told 2,000 of its top bankers that a $5 billion fund of soured mortgages and bonds — which it granted as a big portion of 2008 pay — had returned 17% since January, according to people familiar with the matter.

The returns registered well below the 75% increase in Credit Suisse shares over the same period, and the 30% uptick in the benchmark Merrill Lynch high-yield bond index. But the fund still outperformed major stock indices, as well as initial expectations of bankers inside and outside the Swiss bank. One Credit Suisse senior banker initially decried what he called the “eat your own cooking plan” as unfair to employees who didn’t contribute to the bank’s 2008 net loss.

Investment banks usually pay their employees around the end of the year in a combination of cash and stock. But banks are increasingly desperate to pay employees without triggering outrage in Washington and other capitals.

Credit Suisse has taken perhaps the most aggressive approach. Starting at the end of 2008, the bank took a significant portion of the annual bonus pool and switched it from stock to shares in a fund made up primarily of distressed assets. In essence, this means the performance of bets these bankers were originally involved in structuring will help determine whether their 2008 compensation turns into big money or big losses down the road.

Credit Suisse has said one of the reasons it decided on the pay plan was to show regulators in the U.S. and Europe it took the financial crisis seriously.

Paul Calello, Credit Suisse’s investment banking chief, says using the fund as part of the firm’s compensation plan is “thoughtful and responsible.” Mr. Calello, who, like other senior managers, received no bonus for 2008, declined to comment on the fund’s performance.

It is unclear whether other banks will follow Credit Suisse’s lead. Several banks reached Thursday said they have looked at the idea, but no major companies have publicly committed to it. Other Wall Street executives and analysts said the idea could make sense for large commercial banks that still have heavy exposure to commercial real estate or areas of the bond market that haven’t bounced back.

Wall Street firms have “stayed on the sidelines to see how effective” Credit Suisse’s plan is, says Gary Goldstein, president of executive recruiting firm Whitney Group. “I think you’ll see some plans like this at the end of the year.”

Credit Suisse got into many of the toxic assets in the fund during the bull market, when it looked like highly leveraged companies would still be able to pay off their loans. When the markets soured, the bank wasn’t able to sell as many of the loans to investors, so it had to hold onto them and take on greater risk.

In late 2008, the bank decided to create a fund for senior employees that would help move some of these assets off its own balance sheet and into a bonus pool. In the meantime, the bank and its employees could wait out the bear market while those loans recovered in value or were written off.

For now, Credit Suisse may have been a beneficiary of good market timing. The fund assets, which include debt of a Japanese shopping center, a mining company and a U.S. supermarket chain, could still take a turn for the worse before employees are paid. The employees who got the fund can’t cash out of the shares for at least five years.

I like this idea … hopefully some of the other firms on the street will package up their remaining toxic assets into a fund and use that to pay the big boys, freeing up some of the cash on hand to give raises to those of us toward the bottom of the ladder that could use an additional few hundred dollars a month on our paychecks …