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NEW YORK Even as Washington tries to rein in Wall Street pay, bankers are likely to make unusually large gains on the stock grants and options they got after shares in their companies fell sharply in the financial meltdown.
As banks cut bonuses last year, they shifted more pay into stock and options from cash. Within months, the financial system began to mend - partly, many economists say, with the help of billions of dollars in government aid - and that stock began surging in value. Some of it can be cashed in starting in just a few months.
And so bonuses Wall Street got last year, billed as paltry at the time, are turning out to be among the most lucrative ever.
Goldman Sachs, for instance, sharply cut nearly all bonuses last year but gave some executives more options than usual.
The company gave its general counsel, for instance, 104,868 stock options and 14,117 shares in December, when the bank's stock was around $78.
Now shares have more than doubled in value, making the general counsel's stock and option award worth nearly $12million, according to Equilar, an executive compensation research firm in California.
That executive is just one of many who have seen last year's bonuses soar in value, though some of the shares cannot be sold for a few years.
Goldman's bonus pool last year was $4.82 billion, according to the New York attorney general's office, but because about half was paid in stock, it is now worth over $7.8billion. At JPMorgan Chase, workers have seen the value of stock awarded them last year increase at least $3 billion.
Wall Street has long used a mix of stock and cash for bonuses. But the greater emphasis on cash before the financial crisis meant executives could walk away rich even as their companies collapsed.
That has left many on Wall Street - and in Washington - demanding more pay be in stock, in hopes of rewarding long-term performance instead of short-term bets.
The Treasury's special master of pay, Kenneth Feinberg, has said there is "too much reliance on cash" on Wall Street and has proposed stock as an alternative.
Cash or stock?
Banks began the trend by paying more in stock last year. Then, in February, Congress required that bonuses at bailed-out banks be paid entirely in stock. Last month, the Treasury took the idea further by proposing that some executives' salaries be paid in stock. The result is that Wall Street workers have more of their pay at risk than ever.
Still, some compensation experts say risk has been decreased by government backing of the financial system and historically low stock prices. After all, they note, companies like JPMorgan, American Express and Capital One issued stock and options last year when shares had little chance of going anywhere but up.
The stock gains raise questions about the wisdom of pushing bonus pay too far in either direction, favoring either cash or stock. Normal theories about stock compensation and risk-taking may not hold true today, compensation experts say, in large part because of the government's continued financial support of the industry.
And they say the upside at many banks is far bigger than the downside, particularly for banks like Bank of America and Citigroup that have not yet seen their shares recover.
"Right now the world is set up for these people to take big gambles," said Kevin Murphy, a professor at the University of Southern California who advised Treasury on pay. "The worst part of the asymmetry comes from the too-big-to-fail guarantee" that has been reinforced by the government aid.
Paper value can be volatile
Wells Fargo was one of more than a dozen major banks to award executives stock and options since the bailout. In February, the bank gave nearly 3million options and roughly 528,000 shares to 11 executives. On paper, the grants have increased in value to $57.3 million from $12.1 million, according to Equilar.
Pat Callahan, one of the Wells Fargo executives to receive the grants, said the bank's board always considers equity grants in February.
"Of course in February the price was very low, but nobody knew what was going to happen," she said. "It's true that the stock price change from February to now is a mix of economic recovery and things that we've done."
The Wells Fargo options start to become available early next year, though executives there can't sell more than half of them until a year after they retire. Of course, the stock could fall rather than rise before then.
Greater windfalls may come
At some banks, like Goldman and JPMorgan, stock in bonus pools from 2006 and 2007 has almost fully recovered its value.
For upcoming compensation at Citigroup and Bank of America, the Treasury Department mandated the banks pay executives almost entirely in stock. That means if performance goals are met, 19 executives at Citigroup would split $133 million in stock this year and 12 executives at Bank of America would share in $78.6million in stock.
But a greater upside lurks. If Citigroup's stock returns to its early 2008 price of $29, from just above $4 on Friday, the executives' shares from this year alone would be worth over $800 million. Even if the stock rose to only $12, their shares would be worth $400 million.
At Bank of America, seven executives could see their pay packages become worth more than $10 million apiece if the bank's stock increases just $10. A bank spokesman, Bob Stickler, said, "Under that scenario, executives get paid because the shareholders are being paid."
