On 'Bleak' Street, Bosses in Cross Hairs

Wall Street's bleak bonus season just got bleaker at Goldman Sachs Group Inc. and Morgan Stanley, where it is becoming clear that traders aren't the only ones at risk of having their pay taken back. Their bosses are on the hook, too.

The Wall Street securities firms said they would seek to recover pay from any employee whose actions expose the firms to substantial financial or legal repercussions. The firms said the policy isn't new, but the disclosure shows the companies won't just go after the excessive risk-takers if bad trades hurt the firms' profits. The latest disclosures clarify for the first time that managers are on the line.

The companies disclosed the clawback policies separately in Securities and Exchange Commission filings in late January and early February, in connection with agreements they reached to end proxy fights being waged by the office that runs New York City's pension funds.

New York City Comptroller John Liu filed papers last year seeking to force the firms to strengthen their clawback policies.

The move comes at a touchy time on Wall Street, where pay is in decline after a year of mixed financial performance and stock-price declines. At Goldman Sachs, compensation and benefits dropped 21% from a year ago to $12.22 billion, taking per capita pay and perks down to $367,000, a level last seen in the financial crisis. The firm cut 2,400 jobs last year, joining roughly two dozen firms around the globe that plan to shed more than 100,000 positions.

"These two firms have set the standard for clawback policies in the banking industry," said Mr. Liu in a statement Tuesday. "We appreciate the dialogue we've had on this issue and will continue to call for them to disclose the amount of clawbacks if forthcoming regulation does not require it."

Goldman Sachs and Morgan Stanley declined to comment.

Though soft economic growth, volatile markets and tighter rules rank as bigger worries for most on Wall Street than clawbacks triggered by the actions of traders, it is hard to ignore the risk completely. UBS AG, Switzerland's largest bank by assets, said Tuesday that it will cut investment-bank bonuses 60% following a retrenchment that started after a London-based employee made unauthorized trades that cost the bank $2.3 billion.

Regulators have pressured banks to detail clawbacks in compensation agreements since the financial crisis, when, they contend, incentives encouraged Wall Street workers to overlook risk in pursuit of profit.

The banks said they adopted clawback policies but said little beyond that.

It is unclear how effective clawback policies have been in reining in risky behavior. Michael Deutsch, an employment lawyer who specializes in Wall Street pay, said that despite their prevalence, "the actual implementation of a clawback has been pretty rare."

Now, under pressure from shareholders such as the New York comptroller's office,
Goldman Sachs and Morgan Stanley are clarifying their stance. The shareholder group also made these demands on J.P. Morgan Chase & Co. The firm hasn't addressed the proposal.

Goldman Sachs and Morgan Stanley separately said they anticipate a new global regulation from the Basel Committee on Banking Supervision that requires they disclose aggregate dollar amounts clawed back in a given year.

"We believe clawbacks are a focus for our regulators," Goldman Sachs said in correspondence with the comptroller's office disclosed in an SEC filing.

In exchange for the clarifications, the shareholder group withdrew proxy proposals that called on the banks to broaden the scope of their policies, hold managers and supervisors accountable to clawbacks, and publicly disclose clawbacks.

In its proxy last year, Goldman said its clawback policy allowed for forfeiture of stock awards "in the event that conduct or judgment results in a restatement of the firm's financial statements or other significant harm to the firm's business." The firm also can claw back pay for misconduct that results in legal or reputational harm.

Morgan Stanley's proxy last year said clawbacks can be triggered for conduct leading to a restatement, a significant financial loss or other reputational harm.

It explicitly covers "a substantial loss on a trading position or other holding or any loss on a trading position or other holding where an employee operated outside the risk parameters" or where the employee was motivated by pay.