By Liz Hoffman and Tom McGinty
Bank of America Corp.'s top executives are sitting on the right
to buy 400,000 shares of the bank's stock at $54, a perk handed out
by its board a decade ago.
The problem is, the stock trades around $24.
Those stock options are set to expire worthless on Wednesday, a
sign of the lingering effects of the financial crisis and the huge
gap between banks that have recovered fully from that era and those
still far from the targets set during Wall Street's better
times.
Unlike executives at Goldman Sachs Group Inc. and J.P. Morgan
Chase & Co., whose options have by and large paid out, Bank of
America Chief Executive Brian Moynihan this week will forgo 200,000
options, which accounted for about one-fifth of his total pay back
in 2006.
Stock options, which guarantee executives the right to buy
shares at a fixed price in the future, have long driven
tech-industry paydays and were once a large part of Wall Street
bonus packages. The idea was to motivate officials to boost the
stock price, thereby giving them the right to get stock at a
discount years later.
Options have become less popular recently in response to
shareholder pressure, accounting-rule changes and the financial
crisis, which left employees at many companies holding the
equivalent of worthless lottery tickets. The main concern: Options
generated an obsession with the stock price that led to risky
behavior.
But some old options doled out in the mid-2000s -- some of the
last large options grants that remain on Wall Street -- are now
expiring, an event that separates executives into winners and
losers.
In the former camp are those at Goldman and J.P. Morgan, whose
shares both hit all-time closing highs Tuesday. The recent rally
has pushed millions of dollars worth of options at those banks
"into the money," that is, exercisable for the executive at a
gain.
Rivals at Bank of America, Citigroup Inc. and Morgan Stanley,
meanwhile, have watched millions of options expire worthless as
their share price languishes below targets set during peak years
for bank profits.
Of 182 sets of options issued by the five largest Wall Street
firms since 2003, more than half have expired worthless because the
banks' shares were trading below what executives would have had to
pay to take hold of the shares.
The best options batting average belongs to Goldman. Out of
seven options series the bank has granted since 2003, five have
expired and all of them were in the money on their expiration
dates, though about $200 million worth of options that expired in
late November needed the stock-market rally that followed the 2016
presidential election to give them value.
The group laggard is Morgan Stanley. Just one of its 19 options
grants since 2003 that have expired ended up in the money, though
two set to expire next year are comfortably in the money. Over the
same period, Bank of America executives saw about 90% of the 8.1
million shares underlying their option grants expire worthless
The Bank of America options that expire Wednesday were granted
in February 2007, a couple of months after the Charlotte, N.C.,
bank's stock hit what would prove to be its all-time high of
$54.90. Mr. Moynihan was granted the options as part of his pay for
2006, when he was running the bank's wealth-management
business.
Options are being phased out across Wall Street in part because
more shareholders have viewed them as ill-fitting for banks whose
executives should be worried about taking excessive risks.
Many startups and tech firms still embrace options because they
reward big ideas that can drive a surging stock price but expire
worthless if the company falters or just treads water.
Banks are different, though. Since failed banks can create more
widespread problems than a tech startup going under, regulators and
bank boards have encouraged pay plans that reward not only a rising
stock price, but a flat one over a sinking one.
In 2001, options accounted for 51% of total compensation for the
average financial-services CEO, according to Kevin Murphy, a
professor at the University of Southern California. In 2015, it was
about 10%.
The five largest Wall Street firms have stopped issuing options
altogether; the last was Morgan Stanley, which gave out five-year
options to top executives in 2013.
Recently, banks, along with other big U.S. companies, have
shifted toward outright stock grants that are more closely linked
to company performance. Such shares, essentially nonexistent before
2006, accounted for 31% of bank CEO pay in 2015, according to Mr.
Murphy.
Goldman Sachs last year shifted half of Chief Executive Lloyd
Blankfein's bonus to stock units that he receives based on the
firm's return on equity. This year, it moved to 100%
performance-based stock.
At Morgan Stanley, the percentage of CEO James Gorman's pay that
is performance-based stock has doubled since 2010, his first year
on the job. At Bank of America, half of Mr. Moynihan's 2015 pay was
in stock units that depend on the bank's financial performance over
the next three years.
Write to Liz Hoffman at liz.hoffman@wsj.com and Tom McGinty at
tom.mcginty@wsj.com
(END) Dow Jones Newswires
February 15, 2017 05:44 ET (10:44 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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