Bonus Deferrals and Clawbacks: Sign or Decline?

Regardless of how big their bonuses are, Wall Street workers will have something to grumble about this bonus season: restrictions. More banks are deferring bonuses and subjecting them to "clawback" provisions.

When asked if they would accept a "dream" job if subsequent bonuses were entirely in restricted stock subject to clawback, half of 471 respondents said "no" in the FINS.com online question forum Sign or Decline.

Candidates were more amenable to bonus lockups. When asked if they would take a "dream" job offer that came with a three-year lock on cash bonus payouts, only 26% of 338 respondents said "no."

David Wise, senior principal in the executive compensation unit of Hay Group, a compensation consultancy, said bankers are used to deferred pay.

"What's newer is the concept that they could lose access to that pay if performance tanks," he said. "I think that's enough to upset anyone."

Roughly half of 2010 pay at Wall Street's biggest publicly traded companies was deferred, up from about a third, according to Johnson Associates Inc., a compensation consultancy. For example, bonuses for top executives at Greenhill & Co., a boutique investment bank, were solely comprised of restricted shares that vest after five years.

As for clawbacks, the financial regulatory law passed last year requires public companies to adopt policies to revoke incentive-based pay on deals that sour. Nearly three-quarters of the Fortune 100 had clawback provisions in 2009, up from just 18% in 2006, according to Equilar, an executive compensation advisory firm.

Wise, however, called grumbling about the restrictions "short-sighted." Clawbacks and deferrals are "the new normal" and have allowed banks and brokerages to keep bonuses relatively high despite regulatory pressures, he contended.

To date, clawbacks have been a largely empty threat. Since most policies are new and markets have been relatively stable, there have been few reported instances of finance workers having bonuses revoked by their employer. Grumbling about the compensation restrictions will no doubt spike if some bank positions take a hit in coming years.

"We will certainly see some [clawbacks]," Wise said. "And those we do see will get a lot of attention."