Hoping to mute public outrage over huge Wall Street bonuses, the big banks are making a show of paying employees with more restricted stock, which can't be touched for years, and less cash.
Much less well-known is that many of the banks are paying dividends on those shares — even though the employees don't actually own them yet.
Although the perk angers some shareholders, the reality is that executives at banks and other large companies routinely collect dividends on shares that they don't own. Most companies reveal only scant information about the practice, but the sums can really add up.
AllianceBernstein LP chief executive Peter Kraus, for example, pocketed $3.9 million in dividends last year — 14 times his base salary — on a restricted-share grant that doesn't become entirely his until it fully vests at the end of 2013.
The
Goldman Sachs Group Inc.'s chief executive, Lloyd Blankfein, was eligible to receive about $190,000 in dividends last year on his restricted shares; JPMorgan Chase & Co. chief executive Jamie Dimon stood to collect as much as $159,000.
AllianceBernstein, Goldman and JPMorgan declined to comment on last year's pay.
These little-known
dividend payouts will become much larger this year as banks require more employees to take most or even all of their bonuses in restricted stock. The payouts also stand to rise this year as healthier banks begin to bring back the dividends that they slashed last year to conserve cash.
Mr. Dimon, for one, could see the annual payout on the restricted shares he already holds jump to $1.2 million — $200,000 more than his 2008 salary — if JPMorgan restores its dividend to 2008 levels.
To some critics, the payouts are a sneaky way to increase pay.
“People at places like Goldman Sachs are going to reap windfalls in dividends from stocks they haven't earned yet,” said Tony Daley, an economist at the Communications Workers of America.
Compensation experts contend that dividends on unvested shares give employees a sense that their stock grants have greater value, especially since many of them are worth substantially less than they were a few years ago.
The dividends also mean that the executives reap some benefit while they wait to be handed their restricted stock, which typically takes about three years to vest. Some banks reportedly have shortened waiting periods to mere months.
“Companies are constantly struggling to convince employees that compensation in forms other than cash has real value,” said Robert Sedgwick, an attorney who specializes in executive compensation matters at law firm Morrison Cohenn LLC.
Still, some companies have cut back on the dividend payouts.
Just last month, Morgan Stanley tightened up its rules and no longer awards regular cash dividends on unvested restricted stock. The company now accumulates the dividends in a separate account and has tightened vesting requirements so that the awards pay out only after the executive meets performance targets necessary to qualify for the underlying stock.
A spokeswoman said Morgan Stanley changed its policies only because of a 2008 accounting rule change.
Some compensation experts expect this issue to get more attention from shareholders and regulators as the dividend payouts grow.
Consider Mr. Blankfein.
He could receive up to $27 million worth of restricted shares as a bonus for 2009, based on the size of his 2007 cash bonus and the fact that he and other top Goldman officials are receiving bonuses only in restricted stock for last year.
If so, his 2009 stock grant would pay about $250,000 in annual dividends, while Mr. Blankfein waits for the prize to become truly his.
A Goldman spokesman pointed out that the firm's 2009 bonus pool was 20% smaller than 2007's, and Mr. Blankfein's restricted-stock bonus could reflect that.
Aaron Elstein is a senior reporter at sister publication Crain's New York Business.
