Share-Based Bonuses on the Rise

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The movement toward paying bonuses in shares instead of cash is gaining steam.

JPMorgan, Citigroup and Merrill Lynch each took steps in that direction, according to media reports and SEC filings this week. Meanwhile, UBS, which launched the trend last autumn, signaled that the credit crisis may be widening beyond sub-prime by disclosing that its fourth-quarter write-down of troubled assets will be $4 billion worse than UBS estimated seven weeks ago.

The news isn't all bad. Banks are awarding stock to their highest-paid employees "to ensure the limited cash pool is distributed most heavily to lower paid employees," according to Financial News. And in Merrill's case, three senior executives who didn't earn a bonus for 2007 were handed new packages of "retention stock options," potentially worth millions of dollars to each executive.

At Citigroup, the highest paid managing directors reportedly will get between 20 percent and 50 percent of their bonuses in the form of restricted stock that vests over two years instead of the usual four. Financial News says it got its information from an unnamed source "familiar with the situation."

JPMorgan reallocated 5 percent - 10 percent from cash to stock in the pay packages of managing directors making more than $1 million, the newspaper says. It says a banker there who earns $1.5 million will be paid 60 percent cash and 40 percent shares.

The story also says that Merrill Lynch lowered the cash portion of bonuses from 75 percent to 60 percent.

Merrill's New 'Retention Options' For Three Executives

Separately, Merrill said in an SEC filing that "the Company will not pay bonuses to executive officers for performance in 2007." In the same filing, however, Merrill said it decided to make new stock option grants to three executives, "in order to promote the continuity of the management team." President Greg Fleming will receive close to 1.2 million of the new options, wealth management head Robert McCann will receive roughly 1 million, and General Counsel Rosemary Berkery will get almost 600,000. The options have an eight-year life starting from an initial exercise date of Jan. 28, 2010, and a strike price close to Merrill's current share price of around $56. One-third are plain-vanilla options, while the other two-thirds can be exercised only if Merrill's share price climbs to $80 or $100.

On Wednesday, Merrill Lynch Chief Executive John Thain said at a conference that the bank will exit the collateralized debt obligation and structured credit business, and will refocus on raising its share of stock and bond underwriting fees to "top three as opposed to top five."

Meanwhile, UBS on Wednesday raised its estimated fourth-quarter write-down for various troubled fixed-income assets to $14 billion, from a previous estimate of $10 billion. Half of the added $4 billion loss stems from sub-prime mortgage holdings, but UBS didn't state the source of the other half.

That's fueling speculation that the entire industry may soon face a new wave of losses from assets that have figured only minimally in the write-downs thus far, such as commercial mortgage securities and alt-A mortgage loans.

Additional large-scale write-downs could spark a fresh wave of layoffs across Wall Street. At UBS, the latest revelation came two weeks after its employees were told the bank will end proprietary credit trading in the U.S., withdraw from some commodity markets, combine a number of business units and generally pull back from unprofitable or high-risk activities.

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