Lehman Brothers

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As if Wall Street had not seen enough eye-popping numbers already this year. Investment banks have churned out record earnings. Share prices have hit record levels. And, you guessed it, bonuses should be preceded by the “R” word. Dick Fuld’s $187m of restricted stock over 10 years to keep him as chief executive of Lehman Brothers almost blends in.

It would not have done in 2001, when the Lehman’s compensation committee seems to have decided that the restricted stock awards due to senior executives under plans dating from 1996 and 1997 had soared uncomfortably high. So the awards were split, with half going into a bucket that came due on a change of control. Now Mr Fuld, and others, will get that second bucket of restricted stock. In his case, annual payments worth $18.7m if he stays at the firm for 10 years.

There is obviously a question of whether the carrot of those shares really is necessary to keep Mr Fuld at Lehman. But the underlying thinking is sound. He is now motivated to run the business for the good of all shareholders (including himself), rather than having an incentive to sell the firm one day as his last hurrah.

In spite of some complexity, the grants were disclosed in filings. And the huge overall payouts were due under the original incentive plan. The problem was that no one had factored in how well Lehman might perform. Since the firm went public in the mid-1990s, its shares have risen roughly 15-fold. Even on a relative basis, it has outperformed rivals Bear Stearns and Morgan Stanley.

It would send the wrong signals for boards to cap performance-based payouts. But when balancing performance against potential rewards, they should make themselves aware of quite how big payouts might one day look in the happy event that managers exceed all expectations.

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