Archive for the ‘Bonus Structure’ Category
Is Jefferies Group Inc. moving against the grain by paying bonuses in cash or are they setting a new trend? Hard to predict.
In yesterday’s Wall Street Journal, Lunch Break: Jefferies in Flap Over Plans for Bonuses in Cash discusses backlash to Jefferies’ election to pay bonuses in cash rather than in stock. On my mind is the collection headache Jefferies may have created for itself, which may inure to the benefit of the bonus recipients.
Since bonuses are typically subject to promissory notes or clawback agreements, the company will have the right to pursue the return of the bonus cash based on the terms of those notes or agreements in the event an employee is terminated or leaves its employ. In the case of cash bonuses, the right becomes a burden, creating a distinct “cash problem.” It differs from the forfeiture of unvested equity upon departure, which is typically immediately imposed upon certain events of termination and does not require a collection effort.
As the article contemplates, this will be an experiment worth watching.
Credit Suisse and Bank of America both recently announced changes in their annual bonus arrangements. Given the state of the economy and the cash crunch that many business are facing, companies are becoming more creative in the funding of these bonus arrangements – with a greater portion of annual bonuses are being funded in restricted stock or other investment vehicles. While these arrangements can sometimes provide a potential benefits to their recipients, knowing the details is critical. Credit Suisse’s arrangement, for example, offers no upside to the executives and could theoretically (according to the Wall Street Journal) result in lower payouts. Stock grants provide both potential increases and decreases in value, but often such shares are “restricted,” meaning that executives cannot sell these shares if things go bad and deferred stock arrangements can have unintended income tax liabilities associated with them. As bonus arrangements become more complex and creative, executives will need to engage in more planning – financial, cash flow, and income tax – to properly manage their incentive compensation.
David Harmon co-authored this post with Charles Bruder.