Bank of America
Corp.’s top executives were sitting on the right to buy 400,000 shares of the bank’s stock at $53.85, a perk handed out by its board a decade ago.
The problem is, the stock trades at $24.58.
Those stock options expired worthless on Wednesday, a sign of the lingering effects of the financial crisis and the huge gap between banks that have recovered fully from that era and those still far from the targets set during Wall Street’s better times.
Unlike executives at Goldman Sachs
Group Inc. and J.P. Morgan Chase
& Co., whose options have by and large paid out, Bank of America
Chief Executive Officer Brian Moynihan this week will forgo 200,000 options, which accounted for about one-fifth of his total pay in 2006. Banks, like other public companies, detail options grants and their terms in public filings with the Securities and Exchange Commission.
Stock options, which guarantee executives the right to buy shares at a fixed price in the future, have long driven tech-industry paydays and were once a large part of Wall Street bonus packages. The idea was to motivate officials to boost the stock price, thereby giving them the right to get stock at a discount years later.
Options have become less popular recently in response to shareholder pressure, accounting-rule changes and the financial crisis, which left employees at many companies
holding the equivalent of worthless lottery tickets. The main concern: Options generated an obsession with the stock price that led to risky behavior.
But some old options doled out in the middle part of the last decade—some of the last large options grants that remain on Wall Street—are now expiring, an event that separates executives into winners and losers.
In the former camp are those at Goldman and J.P. Morgan, whose shares both hit closing highs Wednesday. The recent rally has pushed millions of dollars of options at those banks “into the money,” that is, exercisable for the executive at a gain.
Rivals at Bank of America, Citigroup Inc. and Morgan Stanley, meanwhile, have watched millions of options expire worthless as the firms’ share prices languish below targets set during peak years for bank profits.
Of 182 sets of options issued by the five largest Wall Street firms since 2003, more than half have expired worthless because the banks’ shares were trading below what executives would have had to pay to take hold of the shares.
The best options batting average belongs to Goldman. Out of seven options series the bank has granted since 2003, five have expired and all of them were in the money on their expiration dates, though about $200 million of options that expired in late November needed the stock-market rally that followed the 2016 presidential election to give them value.
The group laggard is Morgan Stanley. Just one of its 19 options grants since 2003 that have expired ended up in the money, though two set to expire next year are comfortably in the money. Over the same period, Bank of America
executives saw about 90% of the 8.1 million shares underlying their option grants expire worthless.
The Bank of America
options that expired Wednesday were granted in February 2007, a couple of months after the Charlotte, N.C., bank’s stock hit what would prove to be its all-time high of $54.90. Mr. Moynihan was granted the options as part of his pay for 2006, when he was running the bank’s wealth-management business.
While Bank of America’s share price has languished, its market value is nearly at precrisis highs. The difference between the firm’s overall value and that of individual shares reflects the large amounts of stock the bank had to issue to do things like repay government bailout funds, resulting in huge dilution of shares.
Options are being phased out across Wall Street in part because more shareholders have viewed them as ill-fitting for banks whose executives should be worried about taking excessive risks.
Many startups and tech firms still embrace options because they reward big ideas that can drive a surging stock price but expire worthless if the company falters or just treads water.
Banks are different, though. Because failed banks can create more widespread problems than a tech startup going under, regulators and bank boards have encouraged pay plans that reward not only a rising stock price, but a flat one over a sinking one.
In 2001, options accounted for 51% of total compensation for the average financial-services CEO, according to Kevin Murphy, a professor at the University of Southern California. In 2015, it was about 10%.
The five largest Wall Street firms have stopped issuing options altogether; the last was Morgan Stanley, which gave out five-year options to top executives in 2013.
Recently, banks, along with other big U.S. companies, have shifted toward outright stock grants that are more closely linked to company performance. Such shares, essentially nonexistent before 2006, accounted for 31% of bank CEO pay in 2015, according to Mr. Murphy.
last year shifted half of CEO Lloyd Blankfein’s bonus to stock units that he receives based on the firm’s return on equity. This year, it moved to 100% performance-based stock.
At Morgan Stanley, the percentage of CEO James Gorman’s pay that is performance-based stock has doubled since 2010, his first year on the job. At Bank of America, half of Mr. Moynihan’s 2015 pay was in stock units that depend on the bank’s financial performance over the next three years.