Firms love deferred compensation. After all, it is your money they are deferring, not their own. Just try asking your firm to defer taking its share of your gross commission.
These “golden handcuffs” give you added incentive to stay at the firm, if you want to get paid, that is. The firm, however, has no added incentive to keep you.
To get you to head down this one-way street, many firms offer incentives that promise you additional compensation if you stay long enough. Additionally, you may get to defer income taxes until you collect the deferred compensation.
Deferred compensation plans vary widely from firm to firm. UBS PaineWebber, for example, has the PartnerPlus Plan. Employee contributions are matched by firm contributions, plus a high rate of interest (so-called turbo interest). The employee always keeps his own contributions, but forfeits the matching contribution and interest if he leaves within a certain number of years.
At the other extreme is the Citigroup Capital Accumulation Plan, which covers employees of Salomon Smith Barney. Under the CAP Plan, employees contribute wages through payroll deductions to purchase “restricted shares” of Citigroup stock at a discount to the market value of Citigroup common stock.
After two years, the restricted shares “vest” and the employee receives Citigroup common shares. The catch is that if the employee voluntarily leaves or is fired for cause before vesting, he loses his own wage contributions.
This all-or-nothing aspect of the CAP Plan has led to numerous class action lawsuits and individual arbitrations. Currently, class actions have been filed in California, New York, New Jersey, Florida, Massachusetts and Connecticut. The California class action is scheduled for trial in January 2003, while the other cases are in various pretrial stages with no trial dates set.
The gist of the legal claims in these cases is that the CAP Plan violates state wage laws. In general, wage laws prohibit employers from paying wages in a form other than dollars. This protection harks back to the days when employees were paid in vouchers usable only at the company store. Other laws require that wages be paid on a set schedule or within a certain number of days after termination of employment. In most states, these employee protections cannot be waived, since as a matter of public policy, employers must pay wages even if employees “voluntarily consent” to forfeiture.
Citigroup defends the CAP Plan as a voluntary agreement between two consenting parties that should be enforced like any other contract. Citigroup has good reason to defend the plan — it is a huge moneymaker. About 3 million shares of Citigroup restricted stock are forfeited annually by employees under the CAP Plan. These forfeited shares represent tens of millions of dollars of employee wages used annually to buy back Citigroup stock for the benefit of Citigroup and Smith Barney. With so much at stake, don't expect them to give up the fight easily.
What choices do CAP Plan participants have?
In states in which class actions are pending, you need to find out whether a class has been certified (approved by the court), and if you are included within the “class.” For example, the California class action covers only “former employees.” If you fit in that category and have not filed a request to “opt out” of the class action, you may not pursue your claims individually.
If you work in a state in which there is no pending class action, you may pursue your claim individually in arbitration. You also can assert an individual claim even if there is a class action in your state, if you opt out before the deadline, if the class has not been certified or if you are not included within the definition of the class. Many lawyers around the country are handling these individual cases, and you definitely will need legal advice specific to your situation.
Deferred compensation can be advantageous, but has its risks. Remember the old adage: A bird in the hand is worth two in the bush.
William A. Jacobson is an attorney in Providence, R.I., and represents securities industry employees in employment disputes.