A few years back, hardly anyone objected when the major publicly traded investment banks on Wall Street began to pay more in free stock or options, instead of old-fashioned cash.
That attitude may have changed. Five chief executive officers — four of them still in charge of their companies — have lost a combined $2.2 billion since their firms’ shares peaked in 2007.
The following have paid a heavy price for that:
James Cayne, the former CEO of Bear Stearns Companies. The company’s stock price reached a high of $171.51 on January 12, 2007. On May 30 this year, the stock closed at $9.33, for a decrease of 95 percent. The company was then acquired by JPMorgan Chase & Co.
Cayne sold most of his actual shareholdings at a slightly better price — $10.94 a share — yet he still lost $984 million. But that’s not all. The value of the 800,000 option shares he was holding at the end of the firm’s last fiscal year plummeted, with a paper loss of $74 million. And his free-share grants lost an additional $23 million. Cayne lost $1.1 billion in total.
Richard Fuld of Lehman Brothers Holdings Inc. His company’s stock price peaked at $85.80 a share on February 2, 2007. As of the close on July 18, the stock was selling for $19.11, for a decrease of 78 per cent. Fuld’s actual shareholdings dropped $568 million in value. A loss of $99 million in stock-option paper profits was also incurred. And the value of his free share grants plunged by $156 million. The total tab: $823 million.
GOLDMAN SACHS
Lloyd Blankfein of Goldman Sachs Group Inc. That company’s stock peaked at $247.92 on October 31, 2007. As of the close on July 18, the stock was trading at $182.84, for a decrease of 26 percent. The value of Blankfein’s actual shares dropped $128 million. He also lost $51 million in option paper profits. Hence, his total loss was $179 million.
Blankfein, as it turns out, was comparatively fortunate, because Goldman, alone among the big Wall Street firms, still paid a lot in cash. And it also helped that his company’s stock price dropped the least among those five firms.
MORGAN STANLEY
John Mack of Morgan Stanley. From a peak of $74.13 on June 14, 2007, Morgan Stanley’s stock plunged to $38.57 at the close on July 18 this year — a decline of 48 percent. Mack’s shareholdings dropped $56 million, his option paper profits sank $24 million, and the value of his free shares fell by $40 million. Total losses: $120 million. What saved Mack from an even bigger loss was the fact that he had earlier left Morgan Stanley in 2001 and returned relatively recently — in June 2005. During that interim, he sold about 4 million shares of Morgan Stanley stock.
MERRILL LYNCH
John Thain of Merrill Lynch & Co. Being a newcomer turns out to have been a blessing. Thain didn’t take the helm at Merrill until December 3, 2007, at which point the stock was selling for $59.06. By July 18, the stock had dropped to $30.91, for a decrease of 48 percent. Because he didn’t own many shares (just 11,000), his loss on actual shareholdings was a comparatively tiny $287,000. He had options on 1.8 million shares carrying a strike price of $60.43.
One week after he was hired, Merrill’s stock reached $62.20 and then started falling. His paper loss on options was $3.3 million. His free shares dropped $15.4 million in value. Total loss: almost $19 million.
In 1981 when I first became the pay consultant to Salomon Brothers Inc, I met with the executive committee at the Waldorf-Astoria Hotel in New York to discuss pay strategy.
During a break, I asked Gedale Horowitz, one of Salomon’s top executives, what he and the other committee members were going to do with the millions they had received in former partnership interests now that Salomon had just gone public. I figured there might be a stock tip in there for me. But not so. Horowitz said that everyone in the room was putting everything into AAA-rated municipal bonds.
“Listen,” he said, “we take so much risk in our business that if we can get a nickel out, we don’t put it at risk again”.’
Sound advice then. Sound advice now.
