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New Pay Paradigm Advances

Wells Fargo joined Goldman Sachs in structuring top executives' year-end payouts exclusively in the form of equity at risk, with no cash component. The question now: What if anything do these changes portend for front-office professionals in Wells and elsewhere who aren't senior corporate executives?

The San Francisco-based bank, which repaid its remaining TARP bailout aid in late December, insists the combined $25 million worth of restricted shares it granted Chief Executive John Stumpf and three other top officers represents not an "annual incentive bonus" but a retention grant. The shares can't be sold for three years, will vest only if the company meets "specified performance goals," and are forfeited if the recipient jumps to a competitor.

Regardless what they're called, the grants are clearly meant to replace the traditional cash bonus - for this year at least, for those four Wells Fargo executives.

Will It Go Beyond Senior Executives?

As with similar executive bonus announcements last month from Goldman Sachs and Morgan Stanley, the key question for market professionals is: How far down the pay structure will compensation be restructured and locked up for years? News reports portray all three institutions as acting in part for public image reasons. Well, a year ago most big banks including the above three gave their top circle of executives no bonus of any kind, cash or stock. But any PR mileage they hoped to derive from such forebearance was wiped out when headlines blared that securities industry employees in New York City alone had received an estimated $18.4 billion in cash bonuses for 2008.

eFinancialCareers News has long maintained that public rage at bankers' compensation has little to do with the long-running debate over executive pay - which, as we've also noted, is if anything even more relevant in non-financial corporations than financial ones. Indeed, in recent years the very word, "executive," seems to have morphed into a propaganda slogan whose concrete meaning has broadened to the vanishing point. Critics of the finance industry reflexively attach it to anyone they feel is paid much more than their typical constituent - regardless whether the target is a true corporate officer, a managing director on a trading desk, or an assistant vice president with no direct reports.

So it's naïve to assume pay reformulation will end with each company's top 30 executives. We don't think everyone's bonus will suddenly morph into shares, let alone shares that must be earned anew by racking up a second and third year of results above plan. But don't be surprised to see announcements proliferate this year about bonus clawback plans, "shares at risk" (Goldman's term) and, perhaps, greater use of ex-ante risk gauges in formulas used to determine compensation for individual traders and even deal-makers.

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AUTHORJon Jacobs Insider Comment
  • K
    K
    6 January 2010

    I would take $25 billion of at-risk WFC shares any day of the week! (even if it is Wells)

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