Published August 11, 2009

Guaranteed bonuses return to Wall St as pay review starts

Issue underscores difficulty of curbing pay by Obama team

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(NEW YORK) A guaranteed bonus might strike many people as a contradiction in terms. But on Wall Street, banks have become so eager to lure and keep top deal-makers and traders that they are reviving the practice of offering ironclad, multi-million-dollar payouts - guaranteed, no matter how an employee performs.

The resurrection of the guaranteed bonus is sure to become a hot-button issue for the Obama administration's pay czar, Kenneth Feinberg, who is preparing this week to review how compensation should be structured at seven companies that received two or more bailouts from Washington.

The companies must each submit 2009 compensation plans for their top 25 earners by Thursday, and Mr Feinberg has 60 days to rule on them. He has the authority to single out any of these employees and adjust their pay packages.

In the next phase of review, he is to look at the packages of the next 75 highest earners in each company. For them, he can set pay formulas to be applied broadly.

Mr Feinberg has met privately with executives at the banks and urged them to voluntarily rework any guarantees for big earners in advance of the submission deadline, according to two executives briefed on the discussions, with the goal of holding out these pay packages as examples for the industry.

The resurgence of bonus guarantees underscores just how difficult it is to control Wall Street pay, despite the public outcry over how taxpayer money is being spent.

Consultants on executive pay say that upfront guarantees could result in rich paydays that are unhinged from financial results.

'Is Wall Street again going to over-promise, and then when the market turns down, we'll have another set of pay problems?' asked Alan Johnson, a pay consultant who specialises in financial services.

For a short time, banks had stopped offering bonus guarantees, after the financial crisis turned their profits into losses and as Washington began to scrutinise their use of public money. But now, with banks apparently rebounding after two consecutive profitable quarters, some have resumed the practice, arguing that such bonuses are needed to attract and retain top performers.

Some of the biggest bonus commitments are being made to bond salespeople and traders in currencies and derivatives, and to computer programmers and others who support those operations. Trading has been the main source of the banks' recent profits.

For now, the guarantees are roughly a third smaller than they were at the market's height in 2007, although they are bigger than last year, Mr Johnson said. 'The absolute levels are by historical standards moderate, but it is a big change from where we are at the beginning of the year.'

In the United States, financial companies that have received multiple lifelines, such as Bank of America and Citigroup, recently resumed offering millions in guaranteed bonuses.

They are responding in part to the poaching of employees by foreign banks, including Nomura Securities of Japan, Credit Suisse of Switzerland and Barclay's Capital of Britain, which held out rich promises to lure traders and salespeople that could help them build their businesses in the United States.

Stronger banks that have repaid their bailout money and are not subject to Mr Feinberg's restrictions - such as Goldman Sachs, JPMorgan Chase and Morgan Stanley - have also begun offering guarantees to some new employees.

Sanaz Zaimi, a former partner in the London office of Goldman Sachs, signed a multi-million-dollar contract recently with Bank of America that she told former associates was worth US$15 million a year for two years and includes a guarantee, according to a person with knowledge of her pay.

A Bank of America spokeswoman, Jessica Oppenheim, said that Ms Zaimi's package was guaranteed for only one year and called the amount 'wildly exaggerated', but she declined to provide a figure. Ms Zaimi could not be reached for comment.

Citigroup has been making similar promises, too. Over the past few months, the bank lured several senior equity derivatives traders away from Morgan Stanley with multi-million, multi-year guaranteed bonuses. -- NYT