Wells Fargo's Frozen Bonuses Hurt Unintended Target

Wells Fargo bank branch in New York. (Photo: Bloomberg)

A new religion swept Wall Street after the 2008 crisis: Pay executives with stock, make them wait to collect it, and there will be fewer problems.

Now a generation of executives retiring from Wells Fargo & Co. is experiencing what can happen to those payouts when new scandals arise — even for people uninvolved in wrongdoing.

Dozens of former executives have waited, in some cases for years, to collect millions of dollars in stock-linked bonuses, according to people with knowledge of the situation. Behind the scenes, the company's scandals triggered a series of stringent reviews by both the bank and regulators that must be completed for each payout to proceed.

The situation has swept up executives who haven't been accused of any misconduct, according to the people, who asked not to be named discussing the confidential process. For denizens of the financial industry, it offers a cautionary tale about what can happen now that banks are diverting billions of dollars annually into stock awards to be doled out in the future.

To be sure, Wells Fargo's executives may not draw much public sympathy — their bank has been accused of myriad customer abuses and has become a favorite punching bag across the political spectrum. But their peers at others firms might wonder if they will someday find themselves unwittingly in similar situations.

"That's the fear: You're going to be at the wrong place at the wrong time — you didn't do anything bad but you're going to be judged in a politically, potentially arbitrary way," said Alan Johnson, managing director of compensation consultant Johnson Associates. "It's like nuclear fallout. The bomb didn't drop on you but you were within five miles of it."

Not Far Enough

Delayed compensation came into vogue just after the crisis, as bank investors and regulators looked for ways to end an era of lax supervision, aggressive risk-taking and outright wrongdoing that nearly toppled the global financial system. By delivering a higher portion of annual pay in the form of stock, locking it up for years, and making it susceptible to clawbacks or other terms, stockholders could theoretically take comfort that their long-term interests were aligned with those of the people in charge of running the business. And if something went wrong, it'd be easier to hold individual executives accountable.

Highly paid executives at banks typically received as little as 30% of their earnings in the form of long-term compensation before the financial crisis — a portion that's grown to 50% to 60% today, according to Johnson Associates. Wells Fargo's top five earners received 72% of their pay in long-term awards by 2018, according to its most recent annual proxy statement.

Soon after the lender's scandals began erupting in September 2016, the bank announced it would withhold millions of dollars in unpaid stock awards from some of its most senior leaders, including former Chief Executive Officer John Stumpf and community banking chief Carrie Tolstedt.

Critics led by Senator Elizabeth Warren said that didn't go far enough. They argued that executives paid heavily in stock had long benefited from its rising price, while legions of branch staff lost their jobs for either failing to hit overly aggressive targets or engaging in bogus sales to do so.

Years of Limbo

But unknown to many in the public, a broader drama was starting to unfold inside the San Francisco-based company. In November of that year, the Office of the Comptroller of the Currency withdrew a waiver it had granted the bank a few months earlier so that it could continue paying deferred stock to retiring executives.

Losing the waiver meant thousands of senior managers could be subject to intense scrutiny upon their departure — a review process created by regulators decades ago to prevent executives at troubled banks from escaping with "golden parachutes." Banks have to fill out documents that can run 50 pages long for every applicant, showing retirees weren't involved in any misconduct before they collect shares earned at the peak of their careers. Then, multiple regulators review the paperwork and decide whether payouts can proceed.

Some executives have been in that limbo for years.

"We have been working diligently and constructively with our regulators in this review process, but the process is highly detailed and has, unfortunately, caused a number of former employees to experience delays," Wells Fargo acknowledged in a statement.

"We regret that any former employee who should receive post-departure payments has experienced a delay, and we are looking forward to completing the review process," it said. "We appreciate the patience demonstrated by everyone involved."

Narrowing Process

As the backlog mounted, the OCC reached a new deal with the bank in 2018, limiting the number of executives subject to the reviews and allowing the agency to sign off on behalf of the regulators. Reviews from that wave are also still pending, and senior executives planning to retire soon will enter that process, too.

Last month, the OCC announced civil charges against eight former Wells Fargo executives, looking to levy about $59 million in penalties. Stumpf and two others settled. Tolstedt and four colleagues are fighting the claims.

Meanwhile, a number of federal probes of the bank are rumbling on.

There's an irony in the situation at Wells Fargo. The bank largely skated through the 2008 credit crisis that upended Wall Street and shifted pay practices across the industry. Now its executives are feeling the brunt of those changes.

– With assistance from Peter Eichenbaum.

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