Hedging Your Bonus
I had to stop and think about this one for a few minutes. Eric Dash wrote this piece for Dealbook outlining how partners at Goldman Sachs (among other banks) have been hedging the non-cash portions of their bonuses since 2007. On the surface, it looks like an attempt to circumvent the "safeguards" put in place to keep top bankers focused on the long-term health of the bank and not just taking huge risks to juice a year-end bonus.
Basically what's going on is that top bankers whose bonuses include a hefty portion of illiquid stock are buying puts on their own bank's stock to offset the risk of their bonus stock dropping before they can sell it. Smart, right? But think about the implications for a moment. If you have a bunch of stock you can't sell for two or three years, but you've effectively hedged it with downside protection, do you really care if the company's stock drops?
Employees who hedge their holdings are less concerned about a falling share price. That’s why the government barred top executives at banks that received multiple bailouts from using the strategies until they paid back the funds.
“Many of these hedging activities can create situations when the executives’ interests run counter to the company,’’ said Patrick McGurn, a governance adviser at RiskMetrics.
More broadly, critics say, the practice represents another end run around financial reform.
“Wall Street is saying it is reforming itself by granting stock to executives and exposing them to the long-term risk of that investment,’’ said Lynn E. Turner, a former chief accountant at the Securities and Exchange Commission. “Hedging the risk can substantially undo that reform.’’
So I ask you guys: Is hedging your bonus stock a good idea, or just another way to get around regulations?