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The clause and effect of leaving a job

The "If I can't have you, no one else will" sentiment is typically found in dysfunctional personal relationships, but investment banks are increasingly treating their employees in a similar fashion.

So-called non-compete clauses and variations on them are used by many banks to prevent high-level employees from defecting to rivals.

Standard clauses stipulate that former employees will be fined if they work for specified rivals within a set period and in defined geographical markets.

Variations on the theme state that ex-employees will forego rights to deferred stock and options or other benefits if they defect to named rivals.

The ubiquity of such clauses is illustrated by their presence in the termination agreements of Tarik Meguid and Joseph Perella, senior bankers who left Morgan Stanley last month.

Each risks losing $6.4m (€5.2m) if he joins before December 31 any of 85 rivals from American Express to Goldman Sachs.

Meguid and Perella will also forego payment if they behave in other ways disagreeable to their former employer, including speaking disparagingly of it or associating with the "Group of Eight" ex-Morgan Stanley bankers seeking to depose chief executive and chairman Philip Purcell.

Adam Chinn, a compensation expert at New York law firm Wachtell Lipton Rosen & Katz, drew up the contracts for the bank. He said the terms were generous but not necessarily unusual.

"Non-compete clauses are increasingly common because of the musical chairs on Wall Street. Firms have taken notice and are getting more strenuous with them," he said.

Non-disparagement clauses are included in most contracts held by senior Morgan Stanley bankers, said Chinn but he declined to comment further.

Joel Cohen, an employment partner in the New York office of lawyers McDermott Will & Emery, said linking payouts, typically on deferred stock and options, to not working for competitors, was known as the employee choice doctrine. The choice is that if employees work for a rival, they lose money they would otherwise be entitled to. These clauses can be easier to enforce than standard non-competes that straightforwardly forbid working for rivals and are seen as inhibiting competition.

Stan O'Neal and other senior executives at Merrill Lynch signed similar clauses last September: they will lose deferred stock and options if they leave for the opposition before the vesting dates.

Lazard offered restricted stock to its senior bankers before it went public last month and Charles Ferguson, a solicitor working in the City of London, said similar clauses are widespread in Europe.

Because stock can be deferred for up to five years, employee choice agreements have the potential to keep ex-staff out of the market for considerably longer than standard non-competes, which typically last no longer than six to 12 months.

Whether they work as intended depends on whether rival employers are prepared to compensate for the loss of unvested stock.

Jonathan Baines, a headhunter at Whitehead Mann in London, said new employers would do so when the cost is not too onerous. "A new employer will put a new stock and options programme in place that matches what's being lost and vests over the same period," he said.

In the case of Meguid and Perella, the incentive for good behaviour is not the loss of stock and options but bonus payments for this year: the $6.4m payout is half their bonus allocation for last year.

In normal circumstances, employees who leave voluntarily receive nothing. But Jack Coffee, a professor at Columbia Law School, said Morgan Stanley's deal represents a positive incentive, or a polite bribe, to encourage Meguid and Perella to toe the line.

The size of their payouts has raised eyebrows. Richard Bove, an analyst at Punk Ziegel & Company, said the deal was outrageous and gave other senior Morgan Stanley employees reason to blackmail the firm with threats of departure.

"They're rewarding these guys with $13m for quitting. It gives other people an incentive to quit and treats shareholders like a slush fund," said Bove.

Morgan Stanley declined to comment on the issue.

In April, the New York Post said the bank offered senior staff in equities and investment banking stock of between $5m and $7m on condition that recipients are employed at the vesting date three to five years later.

Given the recent departure of Raymond McGuire, co-head of M&A, for Citigroup, it has had limited effect.

Another option could be available. When Lazard went public it asked the six banks working on the deal to sign agreements not to poach its staff for periods thought to extend up to two years.

If Morgan Stanley merges any of its operations with a rival it could make similar demands to recipients of big advisory fees.

AUTHORAnonymous Insider Comment

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