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A guaranteed bonus might strike many people as a contradiction in terms. But on Wall Street, banks have become so eager to lure and keep top deal-makers and traders that they are reviving the practice of offering ironclad, multimillion-dollar payouts -- guaranteed, no matter how an employee performs.
The resurrection of the guaranteed bonus is sure to become a hot-button issue for the Obama administration's pay czar, Kenneth Feinberg, who is preparing this week to review how compensation should be structured at seven companies that received two or more bailouts from Washington.
The companies must each submit 2009 compensation plans for their top 25 earners by Thursday, and Feinberg has 60 days to rule on them. He has the authority to single out any of these employees and adjust their pay packages.
In the next phase of review, he is to look at the packages of the next 75 highest earners in each company. For them, he can set pay formulas to be applied broadly.
Feinberg has met privately with executives at the banks and urged them to voluntarily rework any guarantees for big earners in advance of the submission deadline, according to two executives briefed on the discussions, with the goal of holding out these pay packages as examples for the industry.
The resurgence of bonus guarantees underscores just how difficult it is to control Wall Street pay, despite the public outcry over how taxpayer money is being spent.
Experts
"Is Wall Street again going to overpromise, and then when the market turns down, we'll have another set of pay problems?" asked Alan Johnson, a pay consultant who specializes in financial services.
For a short time, banks had stopped offering bonus guarantees, after the financial crisis turned their profits into losses and as Washington began to scrutinize their use of public money. But now, with banks apparently rebounding after two consecutive profitable quarters, some have resumed the practice, arguing that such bonuses are needed to attract and retain top performers.
Some of the biggest bonus commitments are being made to bond salespeople and traders in currencies and derivatives, and to computer programmers and others who support those operations. Trading has been the main source of the banks' recent profits.
For now, the guarantees are roughly a third smaller than they were at the market's height in 2007, although they are bigger than last year, Johnson said. "The absolute levels are by historical standards moderate, but it is a big change from where we are at the beginning of the year," he said.
In Britain, where banks have begun to make similar guarantees, regulators have said they are concerned that the practice could lead to poor accountability. Last month Britain's banking watchdog, the Financial Services Authority, sent bank chiefs a letter warning that the widespread use of guarantees "may be inconsistent with effective risk management."
In the United States, financial companies that have received multiple lifelines, like Bank of America and Citigroup, recently resumed offering millions in guaranteed bonuses.
They are responding in part to the poaching of employees by foreign banks, including Nomura Securities of Japan, Credit Suisse of Switzerland and Barclay's Capital of Britain, which held out rich promises to lure traders and salespeople that could help them build out their businesses in the United States.
Stronger banks that have repaid their bailout money and are not subject to Feinberg's restrictions -- like Goldman Sachs, JPMorgan Chase and Morgan Stanley -- have also begun offering guarantees to some new employees.
Sanaz Zaimi, a former partner in the London office of Goldman Sachs, signed a multimillion-dollar contract recently with Bank of America that she told former associates was worth $15 million a year for two years and includes a guarantee, according to a person with knowledge of her pay.
A Bank of America spokeswoman, Jessica Oppenheim, said that Zaimi's package was guaranteed for only one year and called the amount "wildly exaggerated," but she declined to provide a figure. Zaimi could not be reached for comment.
Bank of America also recently offered Bryan Weadock, a veteran bond salesman, a two-year guaranteed package worth roughly $6 million annually in cash and stock to leave JPMorgan, according to a person briefed on the offer, roughly twice the amount he earned the previous year.
"Pay for performance is our standard," Oppenheim said. "It's a competitive marketplace, and we will take the necessary steps to attract and retain top talent."
Citigroup has been making similar promises, too. Over the past few months, the bank lured several senior equity derivatives traders -- including Dan Petherick, Rachael Lord, Stefanos Bitzakidis -- away from Morgan Stanley with multi-million, multi-year guaranteed bonuses. Stephen Cohen, a Citigroup spokesman, declined to comment on individual hires but said attracting and retaining the best talent is "very important" to the success of Citi and all its stakeholders.
And while American International Group or GMAC are not traditional banks, the practice of guaranteed bonuses are alive and well there, too. GMAC, has one-year guaranteed bonuses for about 15 executives, which a spokeswoman said were critical to the company. And AIG is set to pay out about $281 million worth of guaranteed retention bonuses put in place this fall to scores of its salespeople.
Rival banks, meanwhile, are hiring top producers at firms that accepted bailout money with the promise of a guaranteed paycheck that will certainly be beyond the reach of the pay czar. Jeff Michaels, the head of Citigroup's interest rate trading in the United States, found Nomura Securities knocking at his door with an offer that would guarantee him as much as $10 million for 2009 and 2010. That was nearly twice the $6 million guaranteed bonus he received for 2008 when he joined Citigroup from Lehman Brothers last fall, according to a person briefed on the offer. A Nomura spokesman, declined to comment on any of its recent hires.
