New federal pay restrictions on banks that accept TARP funds could hurt efforts at their money management units to attract or retain personnel.
Banks with sizable money management arms that have taken money from the government's Troubled Asset Relief Program include: Bank of America Corp.; Bank of New York Mellon Corp.; Goldman Sachs Group Inc.; JPMorgan Chase & Co.; Morgan Stanley; PNC Financial Services Group Inc; State Street Corp.; and Wells Fargo & Co.
Melissa Daly, Goldman Sachs spokeswoman, said the firm will not make final its compensation package for 2009 until year-end, and that the firm's “intent is to pay back the TARP funds as soon as practicable.” Bank of America spokesman Jon Goldstein said officials there have not yet determined how the compensation restrictions will affect the firm. Spokesmen at BNY Mellon, Morgan Stanley and Wells Fargo declined to comment, while spokesmen at the other firms did not respond to requests for comment.
The American Recovery and Reinvestment Act of 2009, signed into law Feb. 17 by President Barack Obama, restricts cash bonuses for the top five executives plus the next 20 highest-paid employees at companies that have taken $500 million or more in TARP funds. The law limits bonuses to one-third of an individual's total annual compensation and requires them to be paid only as restricted company stock that does not fully vest until the company repays its TARP funds. A presidential order also limits senior executives' salaries to $500,000 for companies seeking further “exceptional” assistance.
Compensation consultants call the new restrictions “draconian” and “dysfunctional,” as parts are not clearly defined. For example, the law's bonus restrictions apply to a company's five executive officers plus the next 20 highest-paid employees, but next year, because of new restrictions, those employees might not be among the highest paid.
“How do I know that I won't be one of the next 25 highest paid?” said Rosie Orens, worldwide partner and compensation consultant at Mercer LLC in New York. “It's just a nuisance.”
Experts say no one fully understands yet how the Treasury Department will translate the new law into regulations, but that the uncertainty will spell trouble for bank-owned money managers.
“Being part of one of the TARP companies is a huge problem in terms of morale and clients and everything else. None of it's good,” said Alan Johnson, managing director at executive compensation firm Johnson Associates Inc., New York.
Although no exodus of staff has yet been seen, experts say frustration is growing among employees of banks' money management units.
“We're getting a lot of calls from people saying, "This isn't a fun place to work any more,' ” said Paul Legvold, New York-based managing partner-asset management at executive search firm Heidrick & Struggles International Inc. “Stand-alone asset management firms like Capital Guardian or Dimensional Fund Advisors are pretty attractive places to work these days.”
Larger hedge funds and private equity firms also will attract talent, said Glenn M. Buggy, partner at executive search firm CTPartners in New York.
Mr. Buggy said talented sales executives are likely to be lured to firms as a way to raise business. “If someone has great institutional contacts, there will be a firm willing to pay a pretty penny,” he said.
Government intervention has not yet been as pervasive in Europe as in the U.S. However, banks such as UBS AG, Zurich, have had to drastically cut bonuses to please regulators after receiving government cash infusions. The bonus pool at UBS Global Asset Management was cut 73% on a per-employee basis as part of a deal with Swiss regulators.
And last week, U.K. government officials ruled out executive bonuses in 2008 for partially nationalized banks, which include Lloyds Banking Group PLC, parent of London-based Scottish Widows Investment Partnership, and The Royal Bank of Scotland Group PLC's London-based RBS Asset Management Ltd.
Experts say employees at bank money management units are wondering whether their divisions will be sold or spun off.
“It's not just about bonuses,” said Frank Hollmeyer, partner at Heidrick & Struggles in London. “A lot of people think investment banks aren't committed to asset management units” and might sell them or spin them off.