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Lehman pay could escape Dodd-Frank rules

April 27, 2012|By Andrew Tangel
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Rules put in place under the Dodd-Frank financial reform law give Wall Street firms significant leeway in deciding which employees – aside from corporate executives – will have their pay tied to long-term performance, a prominent securities law expert said.

The Times spotlighted the top 50 highest-paid employees at Lehman Brothers in the years running up to the bank’s 2008 bankruptcy. The Times showed that Lehman awarded traders and managing directors hundreds of millions of dollars in compensation. In at least one case, one employee stood to get more than the bank’s chief executive.

Those noncorporate officers can pose more significant risk to a firm than top executives, said Columbia University professor John Coffee, citing cases of rogue traders in recent years.

“The people who can most severely injure them are usually the traders,” Coffee said of investment banks.

In the wake of the financial crisis following Lehman’s September 2008 collapse, Congress passed the Dodd-Frank law, and regulators have since meted out the rules. But the rules apply mainly to top corporate officers and give banks discretion on tying lower-level employees’ pay to risk.

“They only applied those hold-back or retention rules to executive officers and other people that the firm voluntarily identifies as able to cause them significant risk,” Coffee said. “Firms have very little incentive to identify other persons … because if they do that and hold back some of their salary they may decide to go to a different firm. Traders are mobile.”

The Times’ story was based on documents that emerged in Lehman’s protracted bankruptcy proceeding.

The documents showed that Lehman’s top 50 highest-paid employees in 2007 stood to get nearly $700 million in compensation (though much of it was in stock that lost its value when the firm went under).

From 2005 to 2007, those 50 employees stood to make about $1.65 billion in compensation, according to the documents.

The full story can be read here.

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