Pay Rule May Give BlackRock a Big Recruiting Boost Over JPMorganby
U.S. incentive-compensation proposal toughest on large lenders
Banks’ employees facing bonus limits outside competitors don’t
Sweeping compensation rules released by six federal agencies last month reserve the toughest constraints -- including bonus deferrals and long-term clawbacks -- for financial firms with huge balance sheets consisting mostly of their own assets. Since firms like BlackRock primarily handle client money, their fund managers would face less-severe limits than someone doing similar work inside a giant bank.
If enacted as-is, the pay rules could hurt Wall Street lenders that have been trying to grow their wealth management businesses since the 2008 financial crisis. Any difficulties Morgan Stanley, Bank of America Corp. and Goldman Sachs Group Inc. face in recruiting and retaining employees could benefit Pacific Management Investment Co., Vanguard Group Inc. and Fidelity Investments.
“They keep making it more difficult to be a big bank,” said Oliver Ireland, a partner with law firm Morrison & Foerster in Washington. It doesn’t make sense to treat a bank employee differently than one who does similar work in an independent firm when the risks they pose to the system “may be identical,” he said.
Lawmakers put bonus-pay restrictions in the 2010 Dodd-Frank Act in response to concerns that incentive-based compensation packages spurred Wall Street executives to take ill-fated risks that contributed to the economic meltdown. The plan endorsed by agencies including the Securities and Exchange Commission and the Federal Reserve applies to all financial firms with more than $1 billion in assets, separating them into three tiers based on size. It targets them with a range of limits for senior officers and significant risk takers -- those who can affect their company’s bottom line.
At the biggest firms with more than $250 billion in assets, top officials would have 60 percent of their bonuses deferred for four years. At firms between $50 billion and $250 billion, half of bonuses would be deferred for three years for high-level officers. Lesser restrictions apply to smaller firms.
More worrisome for the industry may be a provision that allows companies to cancel or take back money for up to seven years after bonuses vest in cases where misconduct is found.
Of the 669 registered investment advisers subject to the rule, the SEC estimated only 18 would face the toughest level of regulation. Many of those are inside banks, and even the world’s largest money manager, BlackRock, doesn’t have enough proprietary assets to put it in the top tier.
Money manager Franklin Resources Inc., which runs a $743 billion mountain of mutual-fund investments, has only about $16 billion of its own assets. And private-equity colossus Blackstone Group LP manages $344 billion, while the company itself has just $22 billion. Even giant hedge funds -- recently flagged by U.S. regulators as deserving more scrutiny for their hefty leverage -- would avoid most of the new limits.
Delaying bonuses is already common on Wall Street, though not all firms defer them for as long as the four years proposed by regulators. For asset management, a review of companies’ disclosures in regulatory filings shows broad similarities between pay practices at banks and those at independent firms.
The prospectus for the $29.4 billion BlackRock Strategic Income Opportunities Portfolio fund says pay consists of base salary and a discretionary amount linked to the company’s overall performance and the investment returns of an employee’s portfolio. JPMorgan’s Core Bond Fund, which manages $30 billion, offers salary supplemented by a bonus, with as much as 60 percent of the incentive compensation deferred for unspecified periods.
The pay-rule proposal represents yet another tax on big banks for being big, said Ireland. He said it adds to a long list of measures targeting Wall Street since the crisis, including tailored capital demands and a ban on banks trading with their own money.
Spokesmen for JPMorgan, Goldman Sachs, Morgan Stanley and Bank of America declined to comment on the potential impact of the rules, as did spokesmen for the SEC and the Fed.
Industry complaints are unlikely to get a sympathetic hearing from regulators responsible for implementing Dodd-Frank. Government officials have long argued that the biggest, most complex banks deserve the toughest rules, because if they go down, they can cause widespread economic damage.
U.S. agencies are lagging behind their overseas counterparts in imposing pay caps. The European Banking Authority moved two years ago to ban bonuses of more than twice an employee’s base pay, leading companies to shift more compensation to salary and forcing the regulator to fend off efforts to skirt the limits. An effort last year to extend bonus limits to asset managers has sparked widespread industry criticism.
Companies affected by the U.S. rules might be able to sidestep the stiffest restrictions if they can slice money-management units away from their banking operations and squeeze assets down below $1 billion, said Marc Trevino, a partner at Sullivan & Cromwell LLP in New York who specializes in pay issues. If they can’t do that, they might have to boost compensation to stay competitive in hiring, he said.
“They may have to pay more, and they may really have to sell the stability of the pay as a positive feature,” Trevino said.
The regulators acknowledged the difficulties their rule might raise for subsidiaries -- which would include asset-management units -- and how it might hurt their ability “to compete for managerial talent with stand-alone companies of the same size.” The proposal suggested the firms might have to pay people more to make up for the stricter requirements, or even spin off the subsidiaries.
Big banks have long competed with independent money managers for top talent, but the rivalry has grown more intense in the wake of a crisis and recovery that has left banks with tattered reputations and fewer opportunities for growth.
Asset managers have become especially valuable for banks in recent years, bolstering profit margins with their steady fee-based income as firms face pressures on lending and trading revenue.
If the major provisions of the rule survive through months of public comment and revisions, the fund managers bringing in those fees will have to decide whether it makes sense to keep working at banks.