Friedman, Billings, Ramsey Group Inc.'s top three executives will forgo the traditional cash bonuses of investment banking and receive most of their pay in the form of company stock from now on, the Arlington investment house said yesterday.
Chief executive Eric F. Billings, investment banking chief J. Rock Tonkel Jr. and President Richard J. Hendrix gave up a combined $6.4 million in cash bonuses they were eligible to receive in the first half of this year and instead received about $5.1 million worth of stock under the new system. The stock is restricted, meaning the executives will not be able to sell it until it vests in three equal annual installments, the company said in a securities filing yesterday.
The change in compensation was announced a day after FBR reported that its profit for the first six months of 2005 had dropped to $77.7 million, down 54.5 percent from the same period the year before. The company, which became Washington's largest investment house on the basis of its expertise in first-time public stock offerings, stumbled earlier this year when founder Emanuel J. Friedman left during a Securities and Exchange Commission investigation into insider trading allegations.
The company's three top executives proposed the new compensation scheme "to further align the interests of the company's senior executive officers with the interests of the company's shareholders," the company said in the filing. It was approved by the FBR board Tuesday.
It also puts FBR in line with a growing trend on Wall Street to use restricted stock grants as a way to encourage "key senior executives" to stay with the company. Restricted stock grants are relinquished if an executive leaves before they vest, decreasing the likelihood that top talent might be lured away.
"I think it was made more for retention than aligning the executives with shareholder interest," said Randall S. Thomas, a professor at Vanderbilt University Law School. "It is a change you're seeing on Wall Street. The problem that investment banks have been having is that they have this strong proclivity to raid one another. The best way to make sure their executives stay home, or are more expensive to steal, is to make sure they hold a lot of stock in a restricted form."
FBR spokesman Bill Dixon declined to comment on the filing.
Retention of its senior talent is a major concern for FBR. Smaller than virtually any Wall Street firm, FBR's bankers have become experts in raising money for mid-size companies by specializing in certain industries and in certain types of transactions. FBR is the industry's leading purveyor of semi-private stock offerings known as 144a offerings and in recent years has raised several billion dollars for companies doing such deals.
While cash bonuses for company or business-unit performance remain the mainstay of most investment bankers' total pay, members of senior management of the country's largest investment banks have in recent years taken more of their compensation in restricted stock.
Last year, Merrill Lynch & Co. paid all of chief executive and chairman E. Stanley O'Neal's $31.3 million bonus in the form of restricted stock, while in years before his bonus was split roughly 50-50 between cash and stock. Likewise, in recent years Goldman Sachs Group Inc. chief executive Henry M. Paulson Jr.'s bonus was switched from mostly cash to mostly stock. Bear Stearns Cos. splits its senior executive bonuses between cash and stock.
In past years, FBR's bonus system has resulted in huge cash awards for top executives at FBR. In 2004, Friedman and Billings each got a $9.4 million cash bonus, Tonkel got $7.3 million and Hendrix received $6.6 million.
However, the new system -- and the decline in profit -- are already having an effect. Along with changing to stock awards, the company reduced its total bonus pool from 7 percent of pretax net income to 4.9 percent because of Friedman's departure. As a result, for the first half of the year, Billings received $1.8 million worth of stock, and Tonkel and Hendrix each received $1.6 million.