Early last year, MF Global floor broker Todd Thielmann received a notice in the mail that his take-home pay would be cut by 10%, with the money diverted to a fund for employees to own restricted stock in the firm.
The timing couldn't have been worse. Less than two years later, the stock is almost worthless.
Mr. Thielmann, who traded grain futures and options in Chicago, was one of 1,121 MF Global employees who were required to participate in the company's revised compensation policy, starting in February 2010.
By getting employees to receive a portion of their income in stock, the company saved nearly $58 million on cash compensation over its last two fiscal years, according to its annual financial statements. Employees also faced severe limits on selling the stock—and would lose the shares if they left to work for a competitor.
The policy change turned out to be a costly one for employees. On Oct. 31, MF Global filed for bankruptcy protection following former chief executive Jon Corzine's disastrous $6.3 billion bet on distressed European sovereign debt.
"It left a bitter taste in everyone's mouth," said former MF Global broker and market strategist Rich Ilczyszyn, who estimates he is out about $100,000 because of the policy.
On Friday, the U.S. House Agriculture Committee voted to subpoena Mr. Corzine as lawmakers seek more details on MF Global's collapse.
A spokesman for Mr. Corzine declined to comment on either the subpoena or the firm's compensation plan.
At the time of the bankruptcy filing, 15.9 million employee shares were tied up in the program and, while the revised policy was in effect, the shares traded at an average price of $7.27.
With shares now trading around 13 cents, that translates to an estimated collective loss of $113.5 million. A company spokeswoman said she could not say how much employees lost in the program but didn't dispute the calculation.
The new pay policy was part of MF Global's attempt to transform itself from a money-losing derivatives broker into a modernized mini-investment bank, according to the company spokeswoman, interviews with former employees and a review of internal company documents and public filings.
"In the past there were more old-fashioned ways of compensating. That was revised to leverage more long-term incentives," the spokeswoman said.
The idea to align employee performance with shareholder interest has been championed within the industry in the aftermath of the financial crisis as a way to discourage short-term thinking that can ultimately hurt companies, said Alan Johnson, a compensation consultant for Johnson Associates.
The losses suffered by employees pale in comparison to the $1.2 billion missing from the accounts of clients, some of whom have been unable to resume normal trading operations. Still, they illustrate a potential pitfall in the strategy of placing a significant share of employees' savings in the stock of their employer.
The employees have now lost both their jobs and their savings in the company's collapse. One employee, who spoke on the condition of not being identified because she is trying to find a new job, was planning to use her $40,000 in shares to pay for her daughter's college tuition next year.
MF Global was struggling when Mr. Corzine—a former U.S. senator, New Jersey governor and chairman of Goldman Sachs Group—became chief executive in March 2010. His arrival coincided with the end of the company's fiscal year, which ended in a $137 million loss.
Mr. Corzine targeted two areas in his first conference call with analysts: cutting costs and changing MF Global's business model. He said he wanted to reduce compensation costs from 63% for fiscal year 2010 to under 50%, according to a transcript of the call.
Mr. Corzine's attempts to increase MF Global revenues beyond brokerage fees included a bolder entry into proprietary trading, which resulted in his bet on European debt.
The pay-policy changes went into effect a month before Mr. Corzine joined the company, but he appeared to embrace them.
"We've initiated a new compensation structure to more closely reflect current practices in our industry," he said on the call. "If we are to grow and profit as a company, we need to adopt a one-firm mentality" and move away from "an individual production philosophy."
MF Global divided its employees into two categories, so-called "producers" such as brokers and traders who generated the firm's revenue, and "professionals" such as analysts and other staff. Producers were required to divert a percentage of their commissions—anywhere from 10% to 50%— into MF Global stock. The company then kicked in up to 20% of the value of each producer's diverted cash with a matching grant of MF Global stock.
For the professional staff, the firm awarded a larger share of annual bonuses in stock instead of cash. The program had a three-year vesting period, and employees could sell a maximum of one-third of their shares each year.
Many brokers and traders were opposed to what they saw as a pay cut; some even left the firm because of it, according to former employees.
But others felt like they had no choice but to go along with it. "We looked at it as a cost of keeping your job," said Mr. Thielmann.
read more: Olympus Wealth Management
No comments:
Post a Comment