Investment bankers at Credit Suisse will be handed back a chunk of the bad assets they generated themselves as part of their bonuses this year.
The strategy clears some of the Swiss bank's exposure to shaky assets while forcing employees to bear the risk of further losses. Many banks are revamping their bonus systems to long-term performance models.
Credit Suisse has written down some $10 billion (SFr11 billion) in the last year as bad investments linked to the subprime mortgage market and other loans turned sour.
The bank has created a new $5 billion fund of distressed assets such as leveraged loans and commercial mortgage securities. Employees in the investment banking division will receive about a fifth of this total as part of their 2008 bonus with the bank securing the remainder.
The assets have been heavily marked down below par value and could incur further losses or make gains depending on the future market situation. Even bankers who were not directly responsible for bad investment decisions would have to take a share of the risk, the bank confirmed.
"We need to demonstrate that we are a responsible player in our industry by providing a new, viable, thoughtful and balanced solution to compensation. Clearly, this is no easy task," read an internal memo from the bank's executive board to employees.
"However, we have done our best to accomplish these goals by introducing a new structure for variable compensation for 2008 which, we believe, strikes an appropriate balance among the interests of our employees, shareholders and regulators."
Chief executive Brady Dougan was also reported to have said that the solution "may not be ideal for everyone".
But one city headhunter said the unwelcome Christmas present would not necessarily lead to a wholesale exodus from Credit Suisse's investment banking unit.
"In the current conditions, people will not be so fickle as to leave their job as a result of a disappointing bonus. For the majority of bankers, simply having a job will be a bonus this year," David Korn, of international financial recruitment firm Options Group, told swissinfo.
But he added that some high fliers might now be tempted to move to smaller banks that have evaded the worst ravages of the subprime crisis.
"As some of the mainstream banks lose their appeal this is a good opportunity for many tier two banks to beef up on any business they are looking to invest in. Some of the elite banks are losing competitive advantage from their franchise name," he said.
The scheme arrives amid a public outcry at bankers receiving hefty bonuses despite racking up huge losses. Switzerland's largest bank, UBS, has already changed its compensation scheme to withhold shares paid as bonuses for several years and later deduct them if long-term performance suffers.
Several former UBS bosses, including ex-chairman Marcel Ospel, have voluntarily repaid a portion of their recent bonuses.
Dominique Biedermann, director of sustainable investment fund Ethos that has long campaigned against "fat cat" pay called on Credit Suisse to take similar action.
Biedermann also insisted that the assets should not have been marked down to their year-end value before being handed over as bonuses.
"Shareholders have paid for this discount and the bankers that receive them now stand to make a profit if they recover in value. Investment bankers have made huge losses this year so why should they be paid any bonuses at all?" he told swissinfo.
swissinfo, Matthew Allen in Zurich
Novel share trading
A Zurich clothing boutique has hit upon a unique way of keeping trade healthy by accepting UBS bank shares as payment for its designer gear.
The "Premier" shop has even upgraded the value of shares to SFr21 (trading at SFr14.30 on Friday afternoon) to persuade customers to part with their stock in exchange for Armani.
Boutique owner Marcel Gayer is banking on the UBS share price recovering to above SFr21 in order to cash in on his offer in future.
The Premier is benefiting from the novel scheme even if not all customers hold UBS shares, according to Gayal.
"Lots of people see the sign [in the shop window]. They laugh and sometimes also come into the shop," he told the Blick tabloid.