US Banks Lag Europe in Executive-Bonus Cuts

At a time when the US taxpayer is bailing out Wall Street with record capital injections, US firms lag European banks when it comes to executives forgoing bonuses.

UBS, Deutsche Bank and Barclays PLC have either pulled bonuses for top executives, or executives there have voluntarily forfeited them.

In the U.S., only New York-based Goldman Sachs Group is pulling bonuses for top executives. Goldman's chief executive Lloyd Blankfein and six deputies will forgo bonuses. Four top executives at Goldman got more than $250 mn in bonuses last year.

There is no word yet whether top executives at Citigroup (C), Morgan Stanley (MS), JPMorgan Chase (JPM) and Merrill Lynch (MER) will voluntarily give up their bonuses, as Wall Street workers are being laid off in record numbers, as Bloomberg terminals are getting yanked from desks, as workers are being told to pay for their own business expenses.

Compensation experts expect that Wall Street firms will increasingly curtail executive cash bonuses and instead pay bonuses in the form of company stock. And the Troubled Asset Relief Program ostensibly is supposed to restrict executive pay at banks that access its funds.

However, the Government Accountability Office says in a new report that the US Treasury has yet to address "critical issues" in its $700 bn bailout, including how officials are ensuring that the banks getting TARP funds are complying with new executive pay limits. 

Merrill Lynch Bonus Cuts

Merrill Lynch is the latest firm to slash bonuses across the board on average 50%, still less than the average estimated 70% bonus cut for all firms on the Street. However, there is still no word whether Merrill's top managers will voluntarily forgo their bonuses. John Thain got a $15 mn bonus when he joined Merrill a year ago.

The Bonus Controversy

The bonus controversy comes amidst historic bailouts of financial companies around the world and under heightened scrutiny from politicians and taxpayers. Bankers' bonuses have been blamed for causing the financial crisis, as the payouts were blamed for creating a short-term focus on fast profits and an environment of heightened risk, instead of long-term stability.

Wall Street firms have vowed not to use their recent $125 bn cash infusion from the US government to pay bankers' bonuses.

Elected Officials Scrutinize Bonuses

Congress is supposedly taking a hard look at Wall Street executive bonuses.

New York State Attorney General Andrew M. Cuomo has demanded detailed information about bonuses and pay, sending letters to nine Wall Street firms that received $125 bn in taxpayer funding as part of the U.S. Treasury Department's Troubled Asset Relief Program.

Dissatisfied with Bank of America's disclosures, Cuomo has also subpoenaed the bank for a list of executives who received a bonus of more than $250,000 over the past two years, The Wall Street Journal reports. Cuomo is attempting to ensure that none of the $125 bn the banks have received from TARP will be used on executive pay.

Already, Goldman Sachs Group, Bank of America and Wells Fargo have told Congress that none of the total of $75 bn they have received from US taxpayers is being used to pay salaries or bonuses.

Kenneth D. Lewis, Bank of America's chief executive, received $4.25 mn in non-equity cash bonuses in 2007, along with another $4.25 mn in restricted stock. Reports indicate that Lewis's 2007 payout is less than half of his target bonus of $18.5 mn in cash and restricted stock, indicating the bank "significantly missed" its main financial goals for that year.

Europe Takes the Lead

In Europe, top executives at the Swiss bank UBS yanked bonuses for chief executive Marcel Rohner and 11 other top executives. Executives have given back an estimated $58.3 mn in bonuses after a record $48.6 bn of write-downs at UBS, more than any other bank in Europe, forced it to take $59.2 bn in aid from the state.

Former chairman Marcel Ospel and two former colleagues on the board offered to forgo $27.5 mn in pay. Former CEO Peter Wuffli, who left the bank last year, waived his $1 mn payout.

UBS also was first out of the box with a new plan to claw back executive bonuses in the years after they are awarded. The bonus restrictions include a new plan where executives will get as much as a third of the bonus paid out immediately, with the remaining two-thirds put into an escrow account for at least a year, subject to reductions if there is a loss at the executives' divisions or the whole bank.  

Share-based bonuses will not vest for three years and executives will be "obliged to hold three quarters of their vested shares (after paying taxes) for several more years," UBS disclosed.  

Deutsche Bank kicked off the bonus forfeiture trend, in October, as it slashed bonuses for its board. Deutsche Bank's Josef Ackerman, the highest-paid executive of Germany's top 30 companies, was among the execs there who voluntarily waived a year-end bonus. Deutsche's investment banking chiefs Anshu Jain, Michael Cohrs and members of the bank's management and supervisory boards also forfeited their bonuses for this year.

London-based Barclays PLC, which needed $10.5 bn in new capital to survive, said it won't pay annual bonuses to top executives, including chief executive officer John Varley. Barclays president and investment banking chief Robert Diamond, consumer bank head Frits Seegers and finance director Chris Lucas will forgo their 2008 bonuses. Diamond got a $9.75 mn bonus last year, reports indicate.

Citigroup Banker Says Bonus Forfeitures Won't Stop Losses

During its crisis in the 90s, Japan's 17 largest banks cut salaries and bonuses after a government bailout, reports indicate.

However, Citigroup chairman Win Bischoff said changing bankers' pay to include more stock and longer-term awards will fail to stop the industry racking up losses, Bloomberg reports.

"By itself, more share and retention-based compensation is not the magic bullet because it certainly didn't stop us from running up very large losses," Bischoff, 67, said recently at a Swiss- American Chamber of Commerce event in Zurich, Bloomberg reports.

Citigroup's senior managers get about half their total compensation in shares and are prohibited from selling more than 25% of the stock awarded, Bloomberg notes, adding that the U.S. government will also have a say over pay at Citigroup after it agreed to give the New York-based bank a $20 bn cash injection.

"You here in Switzerland, and particularly our friends at UBS, have done a lot of good work in this area," when it comes to curtailing bonuses, Bloomberg quotes Bischoff. "However, it's not the only answer."