Even as Washington tries to rein in Wall Street pay, bankers are likely to make unusually large gains on the stock grants and options they received after shares in their companies fell sharply during the financial meltdown.
As banks cut bonuses last year, they shifted more pay into stock and options from cash. Within months, the US financial system began to mend—partly with the help of billions of dollars in government aid—and that stock began surging in value. Some of it can be cashed in starting in just a few months.
And so the bonuses Wall Street received last year, billed as paltry at the time, are turning out to be among the most lucrative payouts ever.
Goldman Sachs Group Inc., for instance, sharply cut nearly all bonuses last year but gave some executives more options than usual. The company gave its general counsel, for instance, 104,868 stock options and 14,117 shares in December, when the bank’s stock was around $78 (Rs3,650 now). Those share have more than doubled in value now, making the general counsel’s stock and option award worth nearly $12 million, according to Equilar, an executive pay research firm in California.
That executive is just one of many Wall Street workers who have seen the bonuses they received last year soar in value, though some of the shares cannot be sold for a few years.
Goldman Sachs’ bonus pool last year was $4.82 billion, according to the New York attorney general’s office, but because about half of that was paid in stock, it is now worth upwards of $7.8 billion. At JPMorgan Chase and Co., workers have seen the value of the stock awarded them last year increase at least $3 billion.
“People have to look at the sizeable gains that have been made since stock and options were granted last year. And the fact, is this was, in many ways, a windfall,” said Jesse M. Brill, chairman of trade publication CompensationStandards.com. “This had nothing to do with people’s performance. These were granted at market lows.”
Wall Street has long used a mix of stock and cash for bonuses. But the greater emphasis on cash before the financial crisis began meant executives could walk away rich even as their companies collapsed.
That has left many on Wall Street—and in Washington— demanding that a greater portion of pay be made in stock in hopes of rewarding long-term performance rather than short-term bets.
Banks began the trend by paying more in stock last year. Then, in February, US Congress required that bonuses at bailed-out banks be paid entirely in stock. Last month, the US treasury department took the idea further by proposing that some executives’ salaries be paid in stock. The result is that Wall Street workers have more of their pay at risk than ever.
Still, some compensation experts say the risk has been decreased by the government’s backing of the financial system and historically low stock prices. After all, they point out, companies such as JPMorgan, American Express Co. and Capital One Financial Corp. issued stock and options last year when their share prices had little chance of going anywhere but up.
The US treasury department declined to comment when asked if these bank executives were being set up for windfalls. Lucian A. Bebchuk, a Harvard Law School professor who advised treasury on pay rules, said, “What should we have done differently?”
“It would be better if you could take the stock and somehow neutralize what the government did, but that’s really tricky,” he said. “If you have equity compensation, sometimes there are massive windfalls.”