What happened to Ina Drew’s clawback?

By Felix Salmon
June 29, 2012
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.


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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.

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