Compensation, Restricted and Unvested Compensation, Bonuses and Loans

Brokers are typically compensated in the following ways: a commission (or other sales charge) on the investment products they sell, a salary with no commissions on product sales, a percentage of the value of the assets they manage for the customer (“Assets Under Management” or “AUM”), or a combination of fees and commissions.

Sometimes, a broker will receive a portion of his/her annual compensation in the form of restricted stock (or, increasingly, in restricted cash). Under this form of compensation, payment is made pursuant to a vesting plan and distribution schedule, which is typically tied to performance milestones or length of service with the firm. Upon vesting, the stock is considered income. Notably, restricted stock may be forfeited in the event the broker is fired or leaves the firm before vesting. Disputes arise when brokerage firms try to claw-back payouts under circumstances where the broker is alleged to have engaged in wrongful conduct during employment or worked for a competitor post-employment in violation of non-compete restrictions.

Often, brokers receive a bonus at year-end as part of their compensation package. In most cases, a bonus, referred to as “incentive compensation” or a “discretionary bonus,” forms a substantial percentage of the broker’s annual compensation. In fact, for many brokers, the year-end bonus is larger than their base salary. Because these bonuses are “discretionary”, disputes arise over whether the broker is entitled to the compensation upon termination or voluntary departure. Sometimes, the course of dealing between the brokerage firm and the broker may evidence an implied promise by the firm that the bonus comprised a portion of the broker’s agreed upon compensation. Other times, an oral agreement for labor or services personally rendered by the broker may evidence entitlement to the bonus. In any event, a broker may have a right to a bonus on a pro rata basis, even if the broker has voluntarily left the firm or was dismissed for cause before bonuses were issued.

In addition to discretionary bonuses, brokerage firms often offer upfront loans as an incentive for a broker to join the firm. These loans, which are memorialized in promissory notes, are typically based on the broker’s production and/or AUM during the previous 12-month period (i.e., the “trailing 12”). While these loans are attractive at the time they are received, in reality, they are golden handcuffs – they are forgiven only after the passage of time. Brokerage firms usually tie these promissory notes to back-end bonuses that pay off a portion of the loan on an anniversary date as long as the broker remains with the firm and reaches his/her commission and/or AUM goals. Disputes arise when a broker is fired or leaves the firm before satisfying the payment obligations under the note.

Freiberger Haber LLP provides representation to investment professionals and investment/brokerage firms involved in employment disputes in which a claim surrounding an employee’s compensation has been asserted. If you are involved in such a dispute, contact the Firm for a confidential evaluation of the case.