Compensation Clawbacks: Bad for Banks, Bad for Shareholders
Banks and bankers are under fire these days for, among other things, the high level of compensation enjoyed on Wall Street, especially bonuses. Some banks have cut the pool from which bonuses are drawn. Others have capped bonus payments. The latest effort to scale back on pay is clawbacks.
The idea is for the bank to reclaim a portion of the bonuses due top earners. Most often, this applies to shares scheduled to vest at certain intervals. So the clawback is a cancelation of a future, albeit promised, payment. UBS is clawing back pay from employees whose division reported an operating loss. Goldman Sachs and Morgan Stanley plan to claw back from employees who put the bank in harm's way, legally or financially.
NetNet spoke with John Singer, a Wall Street plaintiffs' employment attorney at Singer Deutsch. He represents Wall Street bankers, traders and others in compensation disputes, which are usually resolved through arbitration.
LRS: Will clawbacks cause a mass exodus from Wall Street banks?
Singer: Yes, there will be a significant migration from the bigger banks to very small banks outside the target area of regulators. And to hedge funds or private equity firms. The bank model is really not going to work for employees anymore. There's just no incentive to work there anymore.
LRS: What are you seeing in your practice right now?
Singer: In the past 10 years the majority of our cases were people let go right before bonus time, who got no bonus or a fraction of their bonus. Now the majority of calls we get are from people still at the banks, who are being told their deferred bonuses are not vested.
In the past, there wasn't a tremendous fear because if banks wanted to go back to an employee for money they already doled out, the thinking was the money was already gone, the banks wouldn't make a case out of it, and nothing would really happen.
Now, pursuant to Dodd Frank, with 2011 bonuses, what UBS is doing for example, is they are only vesting 50% of what was promised for 2012, which was probably the 2nd of 3 deferred bonus payments. So now the employee has to take the initiative. Now the employee has to be the plaintiff. That changes the game completely.
LRS: Aren't the banks breaking a contract, or at least reneging on a promise that bonuses will be paid?
Singer: Generally people on Wall Street do not have contracts. They're subject to the discretionary bonus plan of the company. What they have is at bonus time they're told about their bonus. And they're promised deferred payments. And yes, the banks are now going back on those promises, but the promise isn't an ironclad legal entitlement.
LRS: And these disputes are resolved through arbitration?
Singer: If you're a banker or a trader, your case is subject to mandatory arbitration by FINRA. What's interesting is that in FINRA arbitration is really all about fairness and equality, not exactly the law. So even though the banks may have the right to claw back, is it fair that you should be penalized along with everyone else? Because they're doing this to everyone, even individuals who performed well. If you had a good year, but the division had a bad year, why should you suffer because the division as a whole didn't perform as expected ? That question will make for some very interesting arbitration cases.
LRS: Are all the banks doing the same thing?
Singer: UBS is telling everyone who made over $2 million that they will only vest for 50 percent. Morgan Stanley, instead of clawing back or failing to vest, is capping bonuses at a certain level. They're capping the cash component at $125,000. Jeffries is doing clawbacks like UBS. The cap is equally unfair, because they're essentially binding you to the bank. They say, "we're going to pay you x amount of deferral," which they've always done to get you stay. But now the cash component is a miniscule portion of the overall compensation, which binds you to the bank and that's unfair. The money being made on Wall Street just isn't what it was.
LRS: What's happened to the argument historically made on Wall Street, that you have to pay people the big money in order to get them to stay?
Singer: We've represented financial services people for years. Our argument has always been that you should pay people commensurately to how they perform. The banks have always said they need to pay people well or they'll leave. But now there's nowhere to go. Whether they're imposing artificial caps, limiting the vesting, or something else, they're all doing something deleterious to their employees.
LRS: What’s the bigger impact of all this talent leaving the banks for hedge funds and private equity, as you predict?
Singer: These compensation clawbacks hurt employees, but ultimately they will hurt the banks, and the shareholders. If bankers and traders don't stay, that will result in a significant diminution of profits, which will hurt shareholders.
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