Limiting the Guaranteed Bonus Practice Isn’t So Easy

A guaranteed bonus might strike many people as a contradiction in terms. But on Wall Street, banks have become so eager to lure and keep top deal makers and traders that they are reviving the practice of offering ironclad, multimillion-dollar payouts — guaranteed, no matter how an employee performs.

Source: Source: NY Times | Published on August 10, 2009

The resurrection of the guaranteed bonus is sure to become a hot-button issue for the Obama administration’s pay czar, Kenneth Feinberg, who is preparing this week to review how compensation should be structured at seven companies that received two or more federal bailouts.

The companies must each submit 2009 compensation plans for their top 25 earners by Thursday, and Mr. Feinberg has 60 days to rule on them. He has the authority to single out any of those employees and adjust their pay packages.

In the next phase, he is to review the packages of the next 75 highest earners in each company. For them, he can set pay formulas to be applied broadly.

Feinberg has met privately with executives at the companies and urged them to voluntarily rework any guarantees for big earners in advance of the submission deadline, according to two executives briefed on the discussions, with the goal of holding out these pay packages as examples for the industry.

The resurgence of bonus guarantees underscores just how difficult it is to control Wall Street pay, despite the public outcry over how taxpayer money is being spent. And it is not the only tough decision Feinberg faces. He also must decide how much overall compensation is too much, even when the pay is tied to performance, like the $100 million package that Citigroup has promised to Andrew J. Hall, a top trader.

But guaranteed pay poses a particular problem, some compensation experts say, because it is unhinged from financial results. “Is Wall Street again going to overpromise, and then when the market turns down, we’ll have another set of pay problems?” asked Alan Johnson, a pay consultant who specializes in financial services.

For a short time, banks had stopped offering guarantees, after the financial crisis turned their profits into losses and as Washington began to scrutinize their use of public money. But now, with banks apparently rebounding after two consecutive profitable quarters, some have resumed the practice, arguing that such bonuses are needed to attract and retain top performers.

Some of the biggest bonus commitments are being made to bond sales staff workers and traders in currencies and derivatives, and to computer programmers and others who support those operations. Trading has been the main source of the banks’ recent profits.

For now, the guarantees are roughly a third smaller than they were at the market’s height in 2007, although they are bigger than they were last year, Johnson said. “The absolute levels are by historical standards moderate, but it is a big change from where we were at the beginning of the year,” he said.

In Britain, where banks have begun to make similar guarantees, regulators have said they are concerned that the practice could lead to poor accountability. Last month, Britain’s banking watchdog, the Financial Services Authority, sent bank chiefs a letter warning that the widespread use of guarantees “may be inconsistent with effective risk management.”

In the U.S., banks like Citigroup and Bank of America have offered guarantees, arguing that they are necessary to attract new employees and keep existing ones. Indeed, foreign banks like Nomura Securities of Japan, Credit Suisse of Switzerland and Barclays Capital of Britain are making guarantees in hopes of poaching talent.

Stronger banks that have repaid their bailout money and are not subject to Mr. Feinberg’s restrictions — like Goldman Sachs, JPMorgan Chase and Morgan Stanley — have also begun offering guarantees to star prospects.