The headline was Wall Street’s version of “Man bites dog.”
Richard Handler, one of the top executives on Wall Street and head of investment bank Jefferies, earlier this week turned down a $2.2 million bonus. The move was voluntary. Handler qualified for the bonus but told his board no thanks.
Handler’s move follows a similar decision by another CEO, long-time timber executive Richard Holley, who gave back a $2 million bonus. Humility is rare in the corner office, especially on Wall Street. So Handler’s move seemed worthy of praise. Perhaps, it seemed, even CEOs were starting to get that their pay has gotten out of whack.
But before we go and hail Handler as a hero in the CEO pay wars, consider this: He probably shouldn’t have qualified for the bonus that he turned down in the first place.
Jefferies had a terrible 2014. Revenue plunged. And a risky bet on the debt of Fannie Mae and Freddie Mac contributed to a $45 million trading loss for the firm. In all, profits at Jefferies fell by 25%. The firm had to admit that a commodities trading business that Handler acquired less than three years ago isn’t working out and may have to be sold.
On top of that, Jefferies’ reputation on Wall Street took a major hit in 2014, as allegations surfaced that there was widespread drug use at the firm. Handler responded by taking a drug test and forcing others at his firm to do so. He declared himself and others at the bank clean. But the bizarre publicity move seemed to add some validity to the claim, and certainly added to the snickering about the firm. Shares of Leucadia, which owns Jefferies, and of which Handler is also the CEO, dropped 21% in 2014.
But here’s the thing, and the real problem with CEO pay: All that can happen, in one year, to the same firm, and its CEO can still qualify for a $2.2 million bonus. In its financial filings, Leucadia sets out the performance measures that Handler and the company’s other executives have to meet to get a bonus. According to its latest proxy filing, Jefferies has to earn at least $386 million a year in pre-tax profits for Handler and the others to earn at least a portion of their $12 million potential bonus. Fair enough.
But here’s the rub: When the company set that goal in late 2012, Jefferies was already on track to earn nearly $492 million that year. So as long as Jefferies’ profits didn’t plunge by more than $106 million by the end of 2014, Handler was entitled to a portion of his “performance” bonus.
Handler didn’t end up clearing that bar. Jefferies’ 2014 pre-tax profits came in at $316 million, or $70 million less that what the company had to earn for Handler to get a bonus. And yet Handler still ended up qualifying for a $2.2 million payout.
How? Leucadia’s proxy filing says that even if the company’s profits plunge by more than $106 million, the board can still give Handler a discretionary bonus, which is “not tied to to any financial metric, formula or result,” including the company’s stock price. That gives the board the ability to give Handler $2.2 million based on nothing, and then he can hand it back and look like a great guy.
Even among Wall Street’s overpaid executives, Handler has been one of the most generously compensated. In 2012, for instance, Handler raked in $45 million, about double the pay of Goldman Sachs CEO Lloyd Blankfein and four times what JPMorgan’s Jamie Dimon got that year. That must have made it quite painless for Handler to hand back $2.2 million in a year when he clearly didn’t deserve it. Just another sign of how well CEO pay works.