Brokers Defend Retention Payouts
Saturday, February 28, 2009
Handsome pay packages for brokers totaling billions of dollars have turned the public spotlight on another corner of Wall Street compensation: retention pay.
The awards, aimed at keeping top-producing brokers from fleeing to rival firms, are drawing scrutiny in Congress and raising tricky issues in the debate over compensation at firms receiving government funds. The Wall Street firms insist their top talent keeps them competitive and helps ensure their financial recovery; critics maintain that any lush payments in the current climate are intolerable.
"Public perception and the need to keep individual people in place -- it's a tough balance," said Charles Elson, director of the Center for Corporate Governance at the University of Delaware. Companies "have to be mindful of the fact that if you're going to pay someone to stay, you better really need them. John Q. Public and the investor class need to be mindful of the fact that the only way these institutions will come back is if they are run by talented and properly motivated individuals. And there are going to be instances where you need to retain critical personnel."
Top brokers at Morgan Stanley and Citigroup's Smith Barney, which are to join forces in a joint venture later this year, learned last week that they will receive packages worth 105 percent of their annual revenue. That means a broker who brought in $2 million last year would get $2.1 million. Much of it will be awarded next year, and the remainder in 2012. The award would have to be paid back to the firm on a prorated basis if the broker were to leave before nine years. Brokers who make less money will be offered smaller packages. All told, 6,500 out of 20,000 brokers at the two firms will be offered a retention package.
The awards are aimed at fending off potential offers from other banking giants, such as Swiss-based UBS, which is not a recipient of U.S. government funds. UBS and others have dangled sizable recruiting packages in front of brokers, those familiar with the packages say. Two weeks ago, an executive at Morgan Stanley raised eyebrows when the Huffington Post Web site posted audio of him reassuring brokers in a conference call that their packages would be "very generous" and warned against calling them "bonuses."
James Wiggins, a spokesman at Morgan Stanley, which has also offered recruiting packages, said the company was "doing what we can to stay competitive."
"We're seeing competitors come in and give top dollars to poach our best people," he said. "We believe we put forward a very reasonable program that . . . allows us to create a successful business while being mindful about the very legitimate concerns that exist about compensation."
Wiggins added that his firm had discussed the retention awards with regulators and was "willing to explain to anyone what the competitive necessity is all about on this."
Separately, top producers among Merrill Lynch's 17,000 brokers recently received generous packages from Bank of America. Some Bank of America brokers also were eligible for awards. The two firms merged last month.
Bank of America and Citigroup have each taken $45 billion in government funds, while Morgan Stanley has received $10 billion.
For its part, Wachovia, which was acquired by Wells Fargo two months ago, decided last week that its brokers will not get payouts after all.
"The initial intention before the world changed was to go down a more conventional road," said Tony Mattera, a Wachovia spokesman. The firm in 2007 handed out what it described at the time as the "most generous retention package ever awarded in our industry."
The decision to forgo awards this time around was reached, Mattera said, after executives considered various factors, including the public's attitude toward pay in the industry.
Critics say retention awards are inappropriate, given the market downturn, clients' dwindling assets and government injections. "They're just totally disconnected from the reality of this crisis," said Sarah Anderson, a director at the Institute for Policy Studies in Washington. "At this time, it's not the right thing to do to be handing out these massive bonuses."
One broker, who recently received a payout and did not want to be named, suggested that while some top producers were being heavily recruited, retention packages were also being handed to those who likely did not need to be convinced to stay.
"It doesn't make much sense," he said. "Here's the question -- where are they going?"
Aides to several senators said this week that the payments were on their radar screens. The powerful House Committee on Oversight and Government Reform, which has the authority to investigate federal programs, is looking at a wide range of compensation at financial firms, including retention awards for brokers, said Ronald Stroman, the committee's staff director.
Wall Street executives counter that government funds are not being used to grant the awards, which they say are critical to retaining talent in an area of their business that is still healthy. Competition is fierce, with some recruiting packages recently broaching nearly three times a broker's annual production, say those familiar with the terms.