EU Adopts Lehman Brothers Bonus Plan for All Banks

Posted by Marc Hodak on July 7, 2010 under Executive compensation, Reporting on pay, Stupid laws | Be the First to Comment

Actually, the WSJ headline was Europe to Limit Banker Bonuses.  They also started the article with a tough sounding lead sure to please the politicians:

The European Parliament agreed to what officials described as the world’s strictest rules on bankers’ bonuses, capping big cash awards across the European Union in time for 2010 payouts.

Then you read the story itself:

The new law, agreed upon Wednesday, will limit upfront cash to 30% of a banker’s total bonus and to 20% in the case of very large bonuses. Between 40% to 60% of bonuses will have to be deferred for at least three years and can be clawed back if the recipient’s investments perform badly.  At least half will have to be paid in stock or “contingent capital,” meaning it won’t be paid if the bank hits difficulties.

Hmm.  This kind of looks familiar. Let’s see how Goldman Sachs was paying its executives before the crash of ’08:

The Named Executive Officers received bonuses in cash and equity-based awards in the proportion of 51% cash and 49% RSUs (restricted stock units).

Well, that wouldn’t quite cut it in Europe; they’re shy of the correct proportion by one percentage point.

Shares underlying all of these year-end RSUs granted for fiscal 2006 will be delivered in January 2010.

Ah, that’s more like it; the 49% of their bonus awarded in stock is deferred for more than three years, and is at risk of loss if the bank hits difficulties.  Nice.

Now, let’s look at how Lehman Brothers was paying its executives before its collapse precipitated the financial crisis:

Annual Incentives were paid in the form of cash and RSUs.  Messrs. Fuld, Gregory, Russo, O’Meara and Lowitt (the five named officers) received 88%, 85%, 64%, 70% and 70% of their total annual compensation in RSUs, respectively.

So, actually, Dick Fuld and company could only collect between 12 and 30 percent of their 2007 bonuses.  The Europeans would go along with that!

All of the RSUs awarded to the executive officers for Fiscal 2007 are subject to forfeiture restrictions and cannot be sold or transferred until they convert to Common Stock at the end of five years.

In other words, the remaining 70 to 88 percent of their awards could not be collected for at least three years, and much more than half was paid in “contingent capital.”  The Europeans would politely applaud.

So, according to the new EU rules, those cads at Goldman were, as usual, just barely outside the boundaries of correctness, while Lehman Brothers bonus plan was A-OK! Doesn’t that just explain everything?