LONDON – Fears of a backlash from shareholders and regulators are preventing major European banks from copying Credit Suisse and paying bonuses in exotic instruments such as specially created derivatives.
Many bankers will see a sharp fall in the size of their bonuses this year, but payouts will still largely be made up of cash and shares as the financial industry seeks to avoid accusations it is using opaque structures to line employees' pockets.
"Last year there was quite a lot of talk about exotic bonuses," said one investment banker, who declined to be named because he is not authorized to speak to the media. "There's no talk about it at all now."
For Credit Suisse, its strategy of paying its employees a portion of their bonuses in sometimes risky assets has not only proved lucrative to some recipients, it also helped cut its exposure to $17 billion worth of loans and deals.
The Swiss bank is repeating the model this year.
Viewed in some quarters as an innovative reaction to the financial crisis, other banks are, however, loathe to follow suit.
The Swiss bank's use of exotic bonuses was born out of necessity when it lost 3 billion Swiss francs ($3.3 billion) in two months in 2008 as the credit crunch hit the value of some of its assets, and it had to improve its capital position.
With other investment banks not under the same sort of intense pressure, they are steering clear of payouts that risk delivering windfalls that could rile investors.
The first Credit Suisse scheme, for example - which gave bankers an interest in toxic assets the bank couldn't sell - has risen in value by more than 80 percent since it was created in 2009, as markets recovered from their all-time lows.
Some argue this was misconceived as a bonus since its beneficiaries were not responsible for the assets' performance.
"The recovery is driven by external forces not connected to employer performance," said a second banker from a Credit Suisse rival, who also declined to comment. "There's a real danger that they deliver undeserved windfall profits to employees."
Within Credit Suisse, there was resistance when the scheme was first announced in 2009. "People saw these assets as toxic and illiquid, and frankly didn't like getting them," said a senior source at the bank.
Despite the paper gains, some bankers dislike the degree of uncertainty attached to the assets. The first banker said he would not want to get his bonus paid that way and knew of staff at Credit Suisse who were unhappy with it. "The flip side is, where do they go?" he added, pointing out the limited alternatives jobs on offer.
Yet some analysts said such schemes had their attractions.
"I think they are a clever way to pay employees well in a relatively opaque way, while at the same time offloading some risk," said Cormac Leech, analyst at Liberum Capital.
When the first Credit Suisse scheme was launched, it was difficult to value the assets involved because their markets were largely paralyzed.
Some assets were marked against valuations for smaller but similar assets that were still trading, others relied on a "proxy" of assets with similar characteristics.
The second scheme, which was based on Credit Suisse's counterparty risk for loans it had extended and deals it was involved in, was valued in the same way.
The Credit Suisse source said it was important to the bank that no one involved in valuing assets for the scheme benefited from the bonus plan, removing potential personal incentives from the valuation process.
"It was a difficult process, trying to arrive at a value that was fair to the staff and the firm, and we spent a great deal of time on that," he said.
Credit Suisse didn't meet significant resistance from its regulator, Finma, to the bonus plan. A Finma source said it had no preference on the instruments used to reward CS staff, as long as compensation didn't harm shareholders or reward short-term risky bets.
Other banks expressed doubts that their regulators would be so accommodating. Britain's code on bankers' pay for instance does not explicitly rule out the use of so-called exotic bonds, but lenders believe they wouldn't be acceptable.
"Our understanding is that it is not regulator-compliant," said a source at one UK bank, whose comments were echoed by sources at three European lenders.
Overall, banks are shifting away from the sort of big handouts common during the boom years. In total, 2012 bonuses could be down as much as 30 percent on 2011 levels.
Barclays and Deutsche Bank are set to cut 2012 payouts for their investment bankers by up to 20 percent, people familiar with the matter said on Monday.
Some of the more adventurous may throw in bonds, such as the contingent convertible bond examined but rejected by Barclays last year, and some may follow Deutsche's recent example of making top bankers wait five years for deferred bonuses instead of three.
For the most part though it is plain vanilla schemes that will greet bankers on bonus day.
"Supervisors and regulators aren't too keen on fancy compensation plans, the desire is to make it more transparent," said Christopher Wheeler, banking analyst at Mediobanca. "Credit Suisse is sloughing a lone furrow."
($1 = 0.9172 Swiss francs)
(Additional reporting by Lionel Laurent in Paris, Katharina Bart in Zurich and Edward Taylor in Frankfurt; Editing by Carmel Crimmins and David Holmes)