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Legal to Give Junk for Bonus?
Credit Suisse Bond Plan May Hit Some Obstacles; Arguing Over 'Clawbacks'
By HEIDI N. MOORE
22 December 2008
Credit Suisse recently announced an overhaul of its usual cash-and-stock bonus plan: The firm will pay its investment bankers' bonuses partly in hard-to-sell junk bonds, and the firm will reclaim, or "claw back," part of the cash portion if employees leave the firm within two years.
The plan is the first of its kind and has been hailed by compensation experts and executive recruiters as a creative solution for bonuses in a cash-strapped year. But is it legal?
Employment lawyers believe the plan might meet with some serious legal challenges. The clawback provision may be the biggest source of legal trouble, according to lawyers. "I think it might change through trial and error," said John Singer, a co-founder of law firm Singer Deutsch. "I also think there will be challenges in court to the legality of this. It is an onerous form of a restrictive covenant that may ultimately not be deemed legal. I think the policy is going to get shelved."
Mr. Singer reasoned that investment-bank employees are required to bring their objection to an arbitration panel. In his opinion, few arbitration panels would allow a bank to take back a banker's bonus if no wrongdoing were found.
Still, Credit Suisse -- and other banks, including Morgan Stanley and UBS, which also have clawback provisions -- may have the law on their side if the cases get to court. That's because bonuses are discretionary, Mr. Singer said. "A bonus is incentive compensation which can fall outside labor laws and they can do what they like," he said. Another labor lawyer agreed: "They can pay people in old shoes, if they like."
Bankers may object, saying the Wall Street bonus system is essentially a kind of variable salary. Many big banks pay their bankers a salary of $200,000 to $600,000 a year, but that is usually less than 20% of their actual compensation, because most of their pay comes in the form of a bonus.
One labor lawyer at one firm said investment banks can change anything they like, as long as they notify employees before they do it. Some of the clawbacks instituted now may be considered changing the goalposts in the middle of the game, this lawyer said, and perhaps employees could argue that they didn't start the year believing they would be paid in junk bonds or with the understanding that they might have to give money back.
In the end, the clawback argument will center on the definition of when an employee has "earned" the money. Wall Street firms will likely argue that their employees only "earn" their money by staying with the firm for at least two years to see their projects through. Employees will argue they earned their money by working for a full year to bring the bank profits. The courts ultimately may be called on to decide who is right.
