Restricted stock is a perfectly reasonable form of compensation. Finance firms are in danger of making it look preposterous.
If you work in an investment bank and you’re a few notches higher than a first-year analyst, you probably received a hefty chunk of your recent bonus in a non-fungible form. Two thirds may be cash, to spend or invest on fast cars and fine wines; the other third is likely to be stock – or options – inaccessible for between three and five years.
So far, so good. But in their eagerness to retain employees, banks are imposing increasingly onerous restrictions on stock issued – to the point, according to one lawyer, that it’s becoming worthless.
“It’s like me saying ‘I’ll give you a bonus worth 1m,’ and then solemnly handing you a banana and saying ‘I value this at 1m and it satisfies my obligation to you,” says Charles Ferguson at Ferguson Solicitors. “When it comes down to it, a lot of these stock and options packages are worth nothing at all.”
Falling bank and brokerage stocks will take the sheen off recent stock payouts, but Ferguson says this isn’t the issue. The problem is that in all but a few circumstances, banks refuse to honour stock awards if employees leave before the vesting date. And the circumstances in which stock payouts will be honoured are being narrowed all the time. “One European bank says that, if you’re made redundant and work for a competitor, you lose the right to your stock and options,” says Ferguson. “And a competitor is now defined as any FSA-registered company – it’s a clear restraint of trade.”
Others seem to be reaching the same opinion. In Ireland last month, a judge ruled that a deferred bonus scheme operated by Davy Stockbrokers constituted a restraint on trade for its employees. Lawyers say it could spell the end of other schemes in the country.
Ferguson has high hopes that a similar ruling could be reached in the UK – a case involving restricted payouts at Nomura is likely to test the issue in the coming months.
What are the chances of the case succeeding and restricted stock being outlawed as an unlawful restraint of trade? As the lawyer representing the case, Ferguson is predictably ebullient. And he has a point: most banks in the City buy out restricted stock as a matter of course, but smaller firms cannot afford to do so. This creates a disincentive for senior financiers to join the kinds of thrifty entrepreneurial operations who could most benefit from their talents.
Now may be the time for banks to re-examine the conditions attached to stock payouts. If not, they could yet be forced to jettison them altogether and more cash may be coming your way.