Zillionaires

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http://dealbook.nytimes.com/2011/12/03/modest-bon…

Modest Bonus Year on Wall St., but Stock Could Yield Fortunes
BY SUSANNE CRAIG

Amanda Gordon/Bloomberg News
Lloyd C. Blankfein, chief of Goldman Sachs.
Buffeted by lackluster profits and turmoil in the global markets, Wall Street is bracing for one of the worst bonus seasons in recent memory. But in the alchemy of high finance, bankers are hoping to turn the slump to their advantage.

Financial firms are preparing to dole out huge amounts of stock at depressed prices, the value of which could rise substantially in a few years.

“This year is the perfect situation where they can say it is a modest bonus season, but in the end, it could end up making many of them zillionaires,” said Jonathan R. Macey, a professor of corporate law and finance at Yale. ”Not all banks may do well in the long run, but most will.”

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Even by Wall Street’s lofty standards, the compensation outlook this year is pretty bleak. Financial firms like Goldman Sachs, Bank of America and Citigroup are culling their ranks, and the remaining employees are resigning themselves to smaller year-end checks, at least in terms of the dollar amount. By some estimates, bonuses could shrink by as much as 30 percent this year.

But a large portion of those payments will be in stock, rather than cash. Since the financial crisis, banks — which have faced withering criticism from lawmakers, investors and the public over their compensation practices — have been pushed by the government to hand out larger swaths of restricted stock and options, which allow an employee to buy shares down the road at a certain price.

Haraz N. Ghanbari/Associated Press
Brian T. Moynihan, chief of Bank of America.
By linking personal compensation to long-term company performance, the hope is to curb the excessive risk-taking that brought the financial system to the brink a few years ago.

Top executives now receive the bulk of their bonuses in shares. In 2010, the chief executive of Goldman Sachs, Lloyd C. Blankfein, received 70 percent of his bonus in restricted stock, roughly $12.6 million. Bank of America awarded its head, Brian T. Moynihan, $9.05 million, entirely in equity.

This year, the pattern is expected to persist, and some bankers are even lobbying for more stock and less cash in the mix, say several senior Wall Street executives responsible for setting compensation but not authorized to speak on the record.

One senior bank executive says he comes in every day “praying” the stock price of his firm does not go up before bonuses are handed out early next year.

“It is all anyone is thinking about,” the executive said on the condition of anonymity because he was not authorized to speak to reporters.

With cash, employees receive a fixed amount. Stock, on the other hand, has the possibility of upside appreciation, albeit with downside risk.

So $1 million of stock today could be worth $1.25 million or more next year — or the shares could be essentially worthless. Equity payouts from 2010 are underwater, in many cases.

This year, bankers are predicting that the shares will rise significantly, or at least not fall much further. Bank stocks, on average, have dropped 40 percent since peaking in February, according to an index put together by the investment bank Keefe, Bruyette & Woods.

“Investors have been betting with their wallets of late and avoiding buying the big brokers,” said Glenn Schorr, an analyst at Nomura. “But if history is any guide, these companies will adapt, improve their profitability and the prices will go up.”

They have used the strategy in the past. With their shares in the doldrums at the depths of the financial crisis in 2008, several firms handed out unusually large amounts of stock to their employees.

In 2009, JPMorgan Chase gave out 131 million shares of restricted stock, with an average price of less than $20 each. As the stock rose the following year, the company paid out 80 million shares, with an average price of almost $43 a share. On Friday, it closed at $32.33.

Goldman granted 36 million options in December 2008, more than 10 times the amount the year before. Afterward, employee stock grants accumulated over time represented 20.3 percent of the total shares outstanding, up from 7.3 percent before the issuance, according to an analysis by Footnoted, a division of Morningstar that scrutinizes corporate disclosures.

It has the potential to be a windfall for Goldman employees. At the time of the grant, the stock was trading at nearly $79. When some of the options began to vest a year later, shares of Goldman had more than doubled in value. While the stock has since pulled back, it still stands at around $97, roughly $20 higher than three years ago. These stock grants can not be sold until 2014. Goldman declined to comment.

Stock grants are not always a boon. In December 2008, Morgan Stanley, which declined to comment, handed out 28 million shares, with an average value of $16.81. But those grants are not looking so good today, with the stock now trading at about $15.50.

Taking shares is still a gamble some bankers are willing to make.

While a bank’s stock could continue to languish amid the economic malaise and regulatory uncertainty, the odds are in the bankers’ favor.

Following periods of prolonged weakness, financial companies typically experience a large price spike the next year. After the recession ended in 2003, the Keefe, Bruyette & Woods index of bank stocks rose more than 40 percent.

“These stock grants have the potential to look a whole lot better three years from now than they do today,” said Mr. Schorr, of Nomura.