The 2007 vintage: when bonus deferrals go HORRIBLY wrong (except at Goldman)

Excitement and incredulity is afoot about the news that senior Goldman executives are about to cash in huge chunks of their deferred bonuses from 2007.

Bloomberg estimates Lloyd Blankfein and Gary Cohn will get $24m each.

Underwater options

Anyone paid in options for 2007 has reason to weep. With the exception of JPMorgan, most are likely to be significantly underwater. Since January 2008, the share price at the following banks has collapsed to the extent indicated below:

Citigroup: -84%

Bank of America: - 68%

UBS: -60%

Morgan Stanley: -47%

Credit Suisse: -39%

Underwater options are equally troublesome at Goldman Sachs. The weighted average strike price of options at Goldman issued in 2007 was $204. The bank's share price is currently $165.

Goldman's clever RSUs

Goldman staff therefore have reason to be thankful that over the past few years the firm has been phasing out stock options and phasing in restricted stock units (RSUs).

While options can only be exercised at a specified price three years in the future, RSUs are 100% vested when granted, but can't be sold before the third anniversary of their issuance.

This means that RSU's issued in 2008 (for the 2007 bonus year) can only be sold in January 2011. 2007 appears to have been a huge year for RSUs at Goldman - issuance of restricted stock and options rose 48% year on year compared to 2006.

Moreover, although Goldman's share price has declined 17% since the RSUs for 2007 were handed out, this doesn't really matter. This is because a) They were fully vested already and b) 'eligible senior executives' were able to purchase them at a discount of 25%.

While bankers paid in options have worthless deferrals from 2007, people paid in RSUs are therefore an exception. It's strangely typical that senior Goldman staff should fall into the latter category.