Wall Street Banks Push Bonus Shares Over Cash

Wednesday, 10 Nov 2010 07:47 AM

 

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U.S. banks are increasingly using stock as the main currency for employees' annual bonuses, in a sign that heightened regulatory scrutiny of Wall Street pay is not likely to diminish as the financial crisis recedes.

Since the crisis' peak in 2008, the largest U.S. banks have been under intense regulatory and public pressure to more closely align employees' interests with those of shareholders, including minimizing cash payments and maximizing longer-term stock awards.

Compensation consultants said the outcry over bank pay in the last two years has led to a new model in the industry that relies less heavily on big annual cash payouts and more on longer-term stock awards.

"Long-term, this is what banking pay is going to look like," said Hay Group principal David Wise, who advises companies on employee compensation issues.

In the latest move, Bank of America is considering swapping the cash component of its annual bonuses for common stock this year, which employees could immediately sell, in part to meet its final requirement in exiting the Troubled Asset Relief Program.

The bank, the largest in the United States by assets, is looking to raise the remaining $1.1 billion of a $3 billion capital requirement that stems from its December 2009 exit from TARP.

Compensation consultants and attorneys said BofA's move is extreme — it is unusual to knock out the cash component of bonuses altogether — but shows the pressures banks face from regulators, politicians and Main Street over pay issues in the wake of the financial crisis.

The furor over fat year-end payouts, a hot-button topic throughout the financial crisis, peaked in 2008 when Wall Street banks paid $18.2 billion in bonuses even though the largest of them had required hundreds of billions in bailout funds just a few months prior.

Public Ire

BofA and Merrill Lynch were at the center of a public firestorm over pay in late 2008 and early 2009.

Merrill paid $4 billion in bonuses after reporting a $15 billion loss for fourth quarter 2008 that spurred Bank of America to ask the federal government for additional aid to complete the buyout of the company.

Last year, Wall Street bonuses jumped 17 percent to $20.3 billion, or an average of $123,580 per employee, according to the New York State comptroller.

Wall Street employees are likely to see just a 5 percent bonus increase from 2009, according to a recent projection by compensation consultants Johnson Associates Inc.

During 2009's bonus payouts earlier this year, some banks paid bonuses in stock, much like BofA may do in early 2011.

Citigroup , for example, paid bonuses to employees in stock to raise equity to repay its TARP aid.

It remains unclear whether banks like JPMorgan Chase and Goldman Sachs, which have more than enough cash on hand already, will follow suit.

Last year, Goldman required its top 30 employees to accept their bonuses entirely in stock. JPMorgan traditionally pays out senior executives' bonuses primarily in stock.

Some banks have bought back shares to offset new issuances to employees and the dilution that brings.

No Guarantee

The main priority in using stock as compensation tends to be boosting capital ratios.

"They use it for other purposes, certainly, but it's all about cash conservation," said Alan Levine, a partner at law firm Morrison Cohen LLP.

In the wake of the 2008 financial crisis, U.S. banks encountered harsh criticism for pay structures that spurred employees to take short-term risks that appeared successful, but then cratered in the long-term.

While regulators are pushing for more stock awards in hopes that this will curb excessive risk-taking at the banks, such a move is no guarantee against bad business decisions.

Both Lehman Brothers, which filed for bankruptcy in September 2008, and Bear Stearns, which JPMorgan Chase bought the previous February, were both heavily owned by insiders.

Morgan Stanley and other banks now have policies in which the shares vest over several years, effectively spreading out the bonus payment, and that allow them to take back bonuses in cases of fraud, said Jeffery Banish, partner at law firm Troutman Sanders LLP.

In its third quarter report filed with U.S. securities regulators on Friday, BofA disclosed that if asset sales do not bring it to the $3 billion capital requirement to exit TARP, it would give employees stock instead of cash for their 2010 bonuses in February.

The stock would vest immediately rather than over two or three years like a typical bonus stock award.

Consultants said that while employees prefer cash, stock awards soothe regulators and the general public, amid nearly 10 percent U.S. unemployment and sluggish economic growth.

"My sense is if you give employees the choice between cash and stock, they'll pick cash every time," said Hay Group's Wise. "But getting stock is the reality of working for a publicly traded bank."

© 2014 Thomson/Reuters. All rights reserved.

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