Felix Salmon

What happened to Ina Drew’s clawback?

By Felix Salmon
June 29, 2012

When he was testifying to Congress, Jamie Dimon hinted that there might be clawbacks of bonuses with the CIO group — the group which lost as much as $9 billion, shattered public trust in the bank, and turned Dimon from a hero into a goat.

Top of the list, when it came to clawbacks, had to be Ina Drew. She was in charge of the CIO, she let the London office become an uncontrollable beast, and she was paid eight-figure bonuses on the grounds that she was going a spectacular job of managing risk. Since we now know that she wasn’t doing a spectacular job of managing risk, JPMorgan not only can but must take some of those bonuses back. Otherwise, the lesson for JPMorgan executives will be clear: if your bets blow up after you’ve received your bonus check, don’t worry, it’s safe with you.

Well, guess what: Drew’s gonna get to keep her bonuses, according to Bloomberg’s Dawn Kopecki.*

Drew wasn’t fired; she was allowed to resign. As a result, she gets to keep, for herself, a whopping great slew of unvested stock and options. Understand: the whole point of vesting is as a retention device. You hand out stock which doesn’t vest for four or five years, as a way of ensuring that the employee in question hangs around for that long: they know that if they leave prior to the vesting date, that element of their compensation is worthless.

Unless, it seems, you work for JPMorgan: Drew had $17.1 million in unvested restricted shares and about $4.4 million in options, and all of them seem to have vested as of May 14, when she resigned. They were meant to incentivize her to work hard; instead, they have turned into a lovely farewell gift from the bank.

It’s unclear how much of that equity in JPMorgan was given to Drew as part of her bonuses over the past couple of years. But some part of it was. So if there was a clawback, JPMorgan would have wound up forcing Drew to forfeit some of her restricted stock. And it didn’t:

While Dimon told lawmakers in separate hearings this month that the company could claw back two years of bonuses, Drew’s pay probably won’t be affected, according to compensation consultants…

JPMorgan’s long-term incentive plan gives Dimon, with approval from the board, the right to reduce Drew’s restricted stock or to further defer vesting if her performance wasn’t satisfactory, according to an amendment to the company’s proxy statement on executive compensation. Restricted stock also can be deferred longer or forfeited if performance has “been unsatisfactory for a sustained period of time.”

If Drew had forfeited any restricted stock or options, the company would have had to disclose it in a public filing with the U.S. Securities and Exchange Commission, Glassner said. Securities laws require any changes in stock ownership to be reported within two business days of the transaction, according to the SEC.

This I think is a huge problem with clawbacks, at least when it comes to senior executives. They get their bonuses annually pretty much as a matter of course, whenever the bank makes a profit and quite often even when it makes a loss. Those bonuses are based on (usually high) unrealized profits, and (usually low) unrealized losses. If the profits in the final analysis turn out to be much lower, or the losses much higher, then the bonuses should retroactively be decreased. But in practice, doing that seems to require some kind of ex-post performance review, where the board determines that the executive’s performance was unsatisfactory.

Bank boards are rubber-stamping muppets, whose job is to never rock the boat. What’s more, the motion to clawback his key lieutenant’s bonus would have to have been put to the board by its chairman and CEO, Jamie Dimon, and I’m sure he could come up with a dozen reasons off the top of his head why he didn’t want to insert such unpleasantness into a board meeting.

So long as clawbacks require board action, I suspect they’ll remain all but nonexistent. Boards have long had the right to dock large amounts of compensation when they fire someone for cause, and that almost never happens. In the wake of the CIO blowup, two things are clear. Firstly, clawbacks will never happen to a current employee: you’ll never see someone continue in their job, while simply repaying a portion of a bonus which was, with the benefit of hindsight, incorrectly calculated. And secondly, clawbacks will almost never happen to ex-employees, either, especially not if they were trusted senior executives who have been allowed to resign rather than being fired for cause.

Or, to put it another way: if you thought that the existence of clawbacks might in itself work as a risk-management tool, think again. They’re an ultra-rare punishment device, not the routine compensation-adjustment mechanism they should be.

*Update: Adding in the Bloomberg citation by request.

21 comments so far | RSS Comments RSS

By not getting bonuses back from Drew, it creates the perception that Drew knows something about Dimon’s involvement in the failed bets. Why else would he allow the options to get vested, when he didn’t have to? To keep Drew from talking about what Dimon knew, and when he knew it. She’s not going to fall on the sword when it wasn’t solely her fault.

Bank boards are not muppets; they, like companies in other industries, are comprised of execs of other companies, who like to ratchet the salaries of execs up, so they can portray their own compensation as below average. Kind of like the unions they whine about.

Posted by KenG_CA | Report as abusive

Wells Fargo INTERNAL USE ONLY: “Client Service and Loyalty Program: Requirement Checklist”

http://hartzman.blogspot.com/2012/06/wel ls-fargo-internal-use-only-client.html

Wells Fargo Advisors INTERNAL USE ONLY: What is 4front?

http://hartzman.blogspot.com/2012/06/wel ls-fargo-advisors-internal-use-only.html

Posted by Hartzman | Report as abusive

FINRA, SEC, DOL, CFPB, FTC, FRB, and PCAOB Wells Fargo Whistleblower Filing

http://hartzman.blogspot.com/2012/06/fin ra-sec-dol-cfpb-ftc-frb-and-pcaob.html

I could use some help with this Felix.

I put my career on the line to do the right thing,
and not one for profit news outlet has done any coverage.

Posted by Hartzman | Report as abusive

KenG seems to be on the right trail here, IMO. As told by Felix the story is pretty much the JPM party line – poor, sick-with-a-bug-bite Drew didn’t tend to her work and things went off the rails. But that (conveniently exculpatory for JD) telling is not consistent with some other facts in the public record.

We know that Drew and her successor tried like hell to rein-in Macris in London, who bullied them – his bosses – into submission. How does a subordinate do that to a superior and survive? Unless – the subordinate has a “rabbi” in higher places than his bosses’ – a rabbi who fully backs the trades at issue at the relevent times.

If I’m that rabbi, it’s worth $20Mil of other people’s money to never have that story told.

Posted by MrRFox | Report as abusive

Vested benefits are treated differently in each separate jurisdiction, so it is quite possible for there to be no ‘story’ here at all. Certainly in Switzerland, most people I’ve seen leave companies have kept their vested benefits.

Posted by FifthDecade | Report as abusive

This proves there is no risk management., Job one is to maintain a club where the board and managements job is to protect each others lifestyle. Restoring confidence in markets and taking any responsibility for real Americans, risk taking (that can change an investors lifestyle) is not ever considered. Anyone who says we do not have a monarchy with complete protection is BLIND.

Posted by william117 | Report as abusive

discretion costs money. how quiet do you want me to be?

Posted by Eericsonjr | Report as abusive

Clawback was a facade meant to placate the masses … can someone from JPM or megabank supporter educate me why opinion is incorrect?

Posted by InfiniteThought | Report as abusive

A good piece, but you are missing the largest element. Someone like Drew likely knows a dozen different things that could get Dimon fired, hundreds which could severely damage JP Morgan, and even a couple that might put people in prison. Claw-backs will never happen and golden parachutes exist for the simple fact that they are hush money.

You agree not to drag the bosses and the company’s name through the mud, and we give you your money. It is a simple equation.

Posted by QCIC | Report as abusive

@ Eric – LOL.

Macris and The Whale – bet they got big paydays all arranged, too. (I’m in the wrong end of the law-biz – the criminals get away with all the big prizes now.)

Posted by MrRFox | Report as abusive

FifthDecade, it was the unvested benefits we’re talking about; according to Felix, Drew had $17M in unvested options (the state of the other $4M in options is not clear).

If bonuses are implemented as options, vested or not, they should be clawed back if the bonuses prove to be unearned. Given the magnitude of the losses from the CIO’s gambling, I would say whatever bonuses Drew was given were definitely unearned.

Posted by KenG_CA | Report as abusive

The fact that she hasn’t thrown Dimon under the bus is proof that she has earned it as far as the people who actually have the decision making ability are concerned.

Posted by QCIC | Report as abusive

@KenG Oops! My bad. Thanks for pointing it out.

I think the normal process with the unvested benefits hereabouts is to convert them to a cash equivalent on leaving, perhaps using the Black-Scholes method. Of course, if the strike price is higher than the share price the value is impacted – but if the strike date is long enough in the future there is still some value to them… is it different in the case under discussion? I’m not familiar with how the US deals with this.

On a side note, we did for a time have two major employers in the town using completely opposite methods for options: one issued options that were taxable on allocation, the other on vesting. This did make it difficult for some people tax wise, especially if the options were given as part of a “Golden Hello” when the tax on their non-cash option award was greater than the cash their salary generated, leaving them with a month or so of negative income.

Posted by FifthDecade | Report as abusive

As for Drew, if all she did was exactly what her boss, Dimon, told her to do – and she has evidence to prove it – while in principle I would be against the award of a bonus on the grounds that no profit was made, it could be argued that a service was provided and her bonus was valid. In such a case it would be Dimon who should pick up the can – but today’s brand of aggressive trader mentality bank CEO seems not to countenance any kind of moral or honourable behaviour that includes ‘resign’ as an option.

All of this is moot if charges are brought though – how far would Drew’s loyalty to her boss go then?

Posted by FifthDecade | Report as abusive

“All of this is moot if charges are brought though – how far would Drew’s loyalty to her boss go then?” (5thD)

Depends on who her lawyer is, and whether he views JPM’s/JD’s interests as more important than hers. (Don’t shake your heads – this is life in the arena.) JPM is going to try to get her to select counsel friendly to it. She has to avoid anyone recommended by the JPM or otherwise even remotely involved with it, and find someone who is working for her only. Not so easy as it sounds – JPM will picking up the bill, so she will feel a natural inclination/responsibility to go with someone JPM’s GC nominates. Don’t do that, Drew.

As you say, 5thD, it would a class act if JD picked up the cost of Drew’s severance; it would also be an admission that it was “hush money”. Can’t go that route.

Posted by MrRFox | Report as abusive

JP Morgan – From predator to Wall Street Prey seekingalpha.com/a/ev5v

Posted by Silk32 | Report as abusive

“All of this is moot if charges are brought though – how far would Drew’s loyalty to her boss go then?” (5thD)

Depends on who her lawyer is, and whether he views JPM’s/JD’s interests as more important than hers. (Don’t shake your heads – happens.) JPM is going to try to get her to select counsel friendly to it. She has to avoid anyone recommended by JPM or otherwise even remotely involved with it or its lawyers, and find someone who will be working for her only. Not so easy as it seems – JPM will be picking up the bill, so she will feel an inclination/responsibility to go with someone JPM’s GC nominates. Don’t do that, Drew.

As you say, 5thD, it would be a class act if JD picked up the cost of Drew’s severance; it would also be an admission that it was “hush money”. Can’t go that route.

Posted by MrRFox | Report as abusive

@Fox, If it reads that I suggested JD pay the severance, that isn’t what I meant; I was saying that if Drew was following orders, she should keep her bonus but he should lose his. If what she was told to do was illegal, he should carry the can ie resign; he certainly shouldn’t be immune.

Posted by FifthDecade | Report as abusive

My apologies for misunderstanding, 5thD.

If JD covers Drew’s $20Mil severance with a cut in his pay, he’s going to have to work for free for like 2 years. And if he covers that because he, not she, was the instigator of the loss, should he cover some or all of that $9Bil the company lost too? More to the point – if Drew et.al. saw the risk and tried to dump the position but JD overruled that – perhaps Drew would be a better CEO-choice going forward than JD? (Wonder if JD’s ever thought of it those terms?)

Best I can see, this was a really bad trade that went really bad-bad – but it doesn’t seem to have been illegal as such; though maybe …. IMO all the present problems with the law come from what was done to try to sweep the facts under the rug – just like at WalMart and for Martha Stewart and so many others – vanity comes at a high price. Matter of fact, as best I can figure it, a $9Bil hit would come to like double the entire total profit of the London Cowboys since JD set-up that operation. (Drew as a CEO looks better and better in comparison all the time, doesn’t she?)

Bet none of this comes as a surprise to Sandy Weill, who recognized JD’s character flaws without the need to see them fully acted-out IRL, and to such great distress, when he dumped JD from Citi. Weill’s a pretty smart guy – always has been.

Posted by MrRFox | Report as abusive

MrFox, Drew is a gambler and has no business running a bank. She can run a hedge fund, where she gambles with other people’s money, but not a bank where she gambles with everybody else’s money. I don’t know that she’s any less responsible than Dimon or anyone else at JPM, but I don’t see anybody really qualified to run a bank.

I’m surprised to see you assuming her innocence; I got the feeling you wanted to send them all to prison.

Posted by KenG_CA | Report as abusive

Perhaps you are right about that, Ken. IDK, but I do K that, from what is reported, Drew did a better job than JD of diagnosing the risks in the transaction at issue. As between the two, she’s got less to answer for than he does, IMO.

And yes, quite – I’d be happy to slip a rope around all of their necks.

Posted by MrRFox | Report as abusive

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