Credit Suisse Group AG's investment bank has found a new way to reduce the risk of losses on about $5 billion of its most illiquid loans and bonds: using them to pay employees' year-end bonuses.

The bank is to use leveraged loans and commercial mortgage-backed debt 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 company, according to a memo sent to employees.

"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," chief executive Brady Dougan and Paul Calello, CEO of the investment bank, said in the memo.

The securities will be placed in a so-called Partner Asset Facility, and eligible employees at the bank, Switzerland's second-biggest, are to get stakes in the facility as part of their pay. Bonuses will take the first hit should the securities decline further in value.

Credit Suisse said this month that it would trim 5,300 jobs and cancel bonuses for top executives after suffering about $2.8 billion of losses in October and November.

Unlike its larger Swiss rival, UBS AG, Credit Suisse has not gotten a government rescue. It is the first to use the debt to pay employees.

Outside investors may also be permitted to invest in the facility, according to the people familiar with the matter, who declined to be identified because the plan has not been made public.

The bank will boost the potential for returns by providing leverage to the facility, and it will be paid back first, according to the people.

Leveraged-loan commitments on Credit Suisse's books fell to between $2.3 billion and $2.8 billion by Nov. 30, from $11 billion at Sept. 30, Mr. Dougan said Dec. 4.

The bank has also "somewhat reduced" its commercial real estate positions, he said. Credit Suisse had about $12 billion of commercial mortgages at the end of September.

Assets in the facility will remain on Credit Suisse's balance sheet and will be held in the company's fund management division, the people familiar with the plan said.

The new structure will mean that any mark-to-market losses or gains on the assets will be offset by identical gains, or losses, on the bank's liability to employees.

Employees will get semiannual coupon payments on their investments in the Partner Asset Facility at the London interbank offered rate plus 2.5 percentage points.

The facility's ultimate value will be determined over the next eight years as the loans and securities mature or default, the people said.

"Cash payments representing distributions of a portion of the award may be made to participants in the future contingent on the performance of the underlying assets," the memo said. "Cash distributions will not be made for several years." The bank said it expects to begin annual payments after five years.

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