Jefferies Lets Bonus Recipients Swap Shares for Cash at 25% Cut

The logo of Jefferies Group Inc. is seen in the entryway of their offices in Houston. Photographer: F. Carter Smith/Bloomberg

Jefferies Group Inc., whose stock dropped by almost half in 2011, gave employees a choice when paying the stock-based portion of their annual bonuses: accept the firm’s shares, or take cash at a 25 percent discount.

The offer to convert stock awards into payouts boosted cash-compensation expense by $17.5 million, the New York-based firm said in an annual financial report. It didn’t disclose how many employees opted for cash, and Richard Khaleel, a company spokesman, declined to elaborate.

Bank stocks slid last year amid concern that new regulations, stagnating economic growth and Europe’s sovereign-debt crisis would prolong an earnings slump. Jefferies’s offer, rare among rivals, gives workers a way to lock in payments amid that uncertainty, said Joseph Sorrentino, a managing director at Steven Hall & Partners, a compensation-consulting firm.

“It’s a cloudy future -- they’re not really sure which way it’s going to go or how long before profits recover,” Sorrentino said of the mood among Wall Street professionals. “What they’re saying is, ‘I’ll take that guarantee at a 25 percent discount.’”

The decision by some employees to take reduced cash lowered share-based compensation expense by $23.3 million in the last fiscal year, Jefferies said in the filing. The cash awards were fully expensed in 2011 and “will legally vest in future periods,” the company said. Jefferies’s offer doesn’t affect the cash-based portion of employees’ bonuses.

Senior Managers

Chief Executive Officer Richard Handler said in December he’s among senior managers, including Brian Friedman, 56, chairman of the executive committee, who declined bonuses for fiscal 2011 after the company’s shares plunged 48 percent. Handler, 50, who receives a $1 million annual salary, didn’t say how much money they turned down.

Handler, who became CEO in 2001, revealed details about his company after MF Global Holdings Ltd. filed for bankruptcy on Oct. 31, spurred by a $6.3 billion bet on the bonds of Europe’s most indebted nations. He published a breakdown of Jefferies’s sovereign bonds, and later sold about three-quarters of the holdings to prove they were liquid. The disclosures helped assure investors and halt the stock’s slide.

Handler also cut total assets to $35 billion in the fiscal fourth quarter from $45.1 billion at Aug. 31. The firm ended November with a $96.1 million net short position against debt and derivatives tied to Portugal, Ireland, Italy, Greece and Spain, including sovereign issuers, corporations and financial institutions, the filing shows. Jefferies shares have climbed 51 percent since Nov. 22, when they hit a 32-month low.

Inadequately Diversified

Some Wall Street employees have inadequately diversified portfolios, with much of their investments tied up in company stock, said Paul Sorbera, president of executive search firm Alliance Consulting. By giving employees a choice, Jefferies helps staff who are risk-averse as well as those who want to continue accumulating stock, he said.

“It probably is a very good step at relieving the concerns some employees may have of risk,” Sorbera said. “It does offer a solution to lack of diversification.”

Jefferies set aside $1.48 billion for pay and benefits in the fiscal year ended Nov. 30, compared with $1.28 billion in the eleven months ended Nov. 30, 2010, according to the filing. The total compensation cost related to share-based plans was $136 million, according to the filing. The company changed its fiscal year-end to Nov. 30 from Dec. 31, starting in 2010.

Morgan Stanley, Citigroup Inc. and Credit Suisse Group AG made some of the year’s biggest cuts in compensation for investment bankers, averaging as much as 30 percent, people with knowledge of the plans have said. Bank of America Corp., the second-largest U.S. lender, is planning pay reductions averaging 25 percent, people have said.

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