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 this: Many of the banks are paying dividends on those shares—even though the employees don't actually own them yet.
While the perk angers some shareholders, the reality is that executives at banks and other large companies routinely collect dividends on shares they don't own. Most companies reveal only scant information about the practice, but a review by Crain's shows that 13 of the 15 best-paid CEOs in New York received them in 2008, the most recent year for which data are available.
The sums can really add up. AllianceBernstein Chief Executive Peter Kraus, for example, pocketed $3.9 million in dividends for 2009—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. Goldman Sachs CEO Lloyd Blankfein was eligible to receive around $190,000 in dividends last year on his restricted shares. J.P. Morgan Chase CEO Jamie Dimon stood to collect as much as $159,000.
AllianceBernstein, Goldman and J.P. Morgan 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 raise the dividends 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 J.P. Morgan restores its dividend to 2008 levels.
To some critics, the payouts smack of 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,” says Tony Daley, an economist at the Communications Workers of America.
The union fought similar payouts at General Electric's 2007 annual meeting after CEO Jeffrey Immelt was paid $1.3 million in dividends—equal to 40% of his salary—on shares he didn't own. It lost.
“It makes no sense to pay people dividends on shares they don't own,” Mr. Daley says. “Shareholders should be outraged.”
Compensation experts contend that dividends on unvested shares give employees a greater sense of “value” from their stock grants, many of which are worth substantially less than a few years ago. The dividends also mean the executives reap some benefit while they wait to be handed their restricted stock, which typically takes around three years to vest. Some impatient 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,” says Robert Sedgwick, an attorney who specializes in executive compensation matters at law firm Morrison Cohen.
Still, some companies have seen fit to cut back on the dividend payouts.
IBM stopped paying cash dividends on unvested restricted grants in 2008. Pfizer ceased cash payouts on restricted stock several years ago and requires dividends to be reinvested in additional shares.
Just last month, Morgan Stanley tightened up its rules and no longer awards regular cash dividends on unvested restricted stock. The bank now accumulates the dividends in a separate account, and it 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 Goldman's Mr. Blankfein. He could get 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 approximately $250,000 in annual dividends while Mr. Blankfein waits for the prize to become truly his.
A Goldman spokesman points out that the firm's 2009 bonus pool was 20% smaller than 2007's, and Mr. Blankfein's restricted stock bonus could reflect that.
Sidebar: Call It deep-pockets change
Most of the highest-paid CEOs in the financial services industry also collected tidy dividends on their vested and unvested stock awards—additional income that's almost never directly reported in company filings. Here are some of last year's top-paid chief executives, and Crain's estimates of their dividend income in 2009:
Peter S. Kraus, AllianceBernstein Holding > $3.9 million
Kenneth J. Chenault, American Express Co.> $308,000
Lloyd C. Blankfein, Goldman Sachs Group Inc.> $191,000
Jamie Dimon, J.P. Morgan Chase & Co.> $159,000
Laurence D. Fink, BlackRock Inc.> $150,000
John R. Strangfeld, Prudential Financial Inc.> $99,000
Vikram Pandit, Citigroup Inc.> $11,000
[This story first appeared in Crain's New York Business, a sister publication to InvestmentNews.]
