Want to see where Wall Street is headed? Follow the money. Payouts on transactions and small accounts are shrinking, while fee business and deferred compensation packages rise higher.
First they tie you down, and then they raise the bar.
While the big firms enhanced their deferred compensation programs, some also boosted production requirements.
In a controversial move just days before the end of the 2000 production year, Morgan Stanley Dean Witter upped its requirements for veterans to get on the grid.
Five- to 10-year producers at MSDW have to hit $250,000 in annual gross, or face a flat 25% payout. Brokers with 10 or more years at the firm have to hit $300,000. This is the first minimum instituted for 10-year plus producers. The penalty affected brokers starting Dec. 22, 2000, the beginning of the new production year. Brokers will get a 25% payout during 2001 until they hit the minimums.
"People are mad," says a West Coast MSDW broker who was not impacted by the change. "The guys who will get cut feel flush about it. They're getting a 25% payout, and they can't do anything about it. Usually you get one year's notice. This is very anti-employee."
The firm likewise raised its requirement for deferred comp bonuses: Producers with five years or more of service must hit $300,000 in gross or they get nothing. The former minimum was $150,000.
MSDW reps can now take 50% of their bonuses in stock and 50% in employee stock options. For every share of stock, brokers get three stock options, which vest in five years. The deferred comp bonus ranges from 3% to 7% of gross production.
"It has tax advantages," says another MSDW rep from the West Coast about the plan. "With options, you can exercise them at your discretion. It's a welcome deal."
In addition, MSDW cut its payout on small tickets. Reps now get paid nothing for tickets up to $30, 10% up to $50 and 20% to $85. Formerly, they got paid 10% up to $35, 20% to $50 and 25% to $75.
First Union's Hybrid Grid First Union had been operating under two pay grids: one from Wheat First and the other from Everen Securities. Taking elements from each grid, First Union created a new one.
A First Union branch manager from the West says: "Usually when compensation is changed, it's a giant ouch. In this case, brokers didn't get hurt. My impression is that it's a nonevent.
"It raised the levels for deferred comp, expense account allowances and production," the BOM says. "Some people got a little haircut, and some people are making more."
A First Union broker in the Midwest agrees the plan isn't too harmful. "It's designed to improve performance. It used to be grid plus 7% bonus at $52,500 monthly, now it's $57,500."
The firm bumped up by $100,000 (to $350,000 annually) the production needed to qualify for deferred compensation and expense accounts.
Reps like that First Union retained a feature from Everen's plan - the ability to eliminate a bad month, which is akin to throwing out a low test score. "If you have a crappy month, you can elect to take one month a year and not get a haircut on it," the manager says. "You can look back and get your payout increased."
"I don't have anything but good to say," says a First Union rep from the mid-Atlantic region. "It's very attractive, and looks like a lot of time and thought went into it. There was an effort made to make sure people are rewarded for loyalty, production and doing the right thing."
Merrill Lynch Pursues Affluent Last year, Merrill Lynch made some cutbacks and adjustments to its pay plan.
In April, Merrill changed the way it compensates brokers for fee business. Instead of a larger quarterly payout, reps started receiving three smaller monthly chunks.
In December, Merrill announced internally that it would be uncapping the fee for the stock portion of its Unlimited Advantage fee-based brokerage account. Brokers can now charge 1.5%, up from 1%, effective January 2001 (see "Merrill Lifts Fee Ceiling on Unlimited Advantage," Page 32).
Also starting in January, Merrill reps are no longer paid on transaction business for accounts with less than $100,000 in assets. They are still paid on annuitized business such as fee accounts, mutual funds and insurance.
"Those accounts are expensive to service," says a Merrill rep in the West. Brokers are being encouraged to move smaller accounts to the firm's investor service center. "Clients can still get the same products and get their questions answered," the broker says.
As of the first of the year, Merrill increased the production requirements for recognition clubs (see "Merrill Lynch Raises Club Hurdles," Page 34). The changes are designed to make it harder for brokers to qualify for trips.
On the plus side, Merrill reps start receiving $100,000 checks this month as part of a 10-year retention bonus based on hitting production growth targets.
More compensation changes are likely. After retail chief Stanley O'Neal took over a year ago, Merrill formed a task force to translate the firm's complicated pay package into plain English. Firm officials have said that no moves are expected until 2002.
PaineWebber Pays for Stays All was quiet at PaineWebber, except of course for the UBS Warburg merger. Brokers were offered retention packages in July.
Chairman's Council members (top 200 producers) got restricted stock worth 35% of production and options on 2,000 shares. President's Council members (next 400 producers) got restricted stock worth 30% of production and options on 1,000 shares. Pacesetters (next 900 producers) got restricted stock worth 25% of production and options on 500 shares. Reps below $275,000 gross got restricted stock worth 10% of production, and recruits joining in 1999 and 2000 got restricted stock worth 5% of production.
Prior to the UBS deal, PaineWebber was in the process of acquiring Nashville, Tenn.-based J.C. Bradford. Bradford reps also got retention bonuses, ranging from 10% to 50% of gross production.
Prudential Slices, Bumps, Juices Prudential Securities revamped its broker pay at the beginning of 2000. It cut payout on transaction business one point and raised it on wrap-fee business by five points. And the firm introduced its MasterShare deferred comp program that invests assets in a Prudential S&P 500 index fund.
In November, Prudential debuted enhancements to MasterShare. Brokers get an additional corporate match depending on their production level and business growth over a three-year period. They can get up to a 200% match (if they grow their business 26% over three years) that starts vesting in year three and is fully vested in year eight.
Response to the enhancements has been mixed. A branch manager from the Southwest says, "It has been extremely positively received, especially by first quintile brokers."
But a Prudential rep from the Southwest isn't that jazzed. "Initially, I thought it was significant but the more I looked at it, the more I think it's a nonevent," he says. "It doesn't start until the fifth year, and it doesn't pay off until the eighth year."
Older brokers, especially, don't see the benefit. "There are a number of us older brokers - probably more productive - who are getting the shaft because it's longer term," says a mid-Atlantic Prudential rep. Many won't be around that long, and so are not in the program.
Edward Jones Goes Retro Edward Jones took the opposite tack from Prudential and cut payout on fee business.
Effective Jan. 1, 2001, the firm cut payouts on C-share mutual funds to 30%, 35% if they convert to A shares in 10 years. Payout on B shares is 35%. Payout on A shares is 40% for equity funds and 39% for bond funds.
"A shares are best for the long-term investor and particularly for a lot of money," says a Jones rep in the Southeast.
In 1999, Jones introduced A-share annuities, which pay out at 40%, and reduced reps' payout on larger B-share annuity tickets to 35%.
"We're the only people out there selling A-share annuities," says a Midwest Jones rep. "It's ingrained in our philosophy."
SSB Makes No Waves Salomon Smith Barney left its grid alone. "They swear nothing has changed from a payout perspective," says an SSB rep on the West Coast. "They continue to offer you new ways to buy the stock. In 2002, they will pay the longevity bonus in stock instead [of cash]."
A second West Coast SSB broker says there is no reason to change the pay structure, other than to encourage something like more fee-based business. "When you have a difficult year like this, they usually don't rock the boat."
The brokerage industry's recruiting frenzy slowed a bit in 2000, but good deals are still being made.
Recruiters note that firms typically pay more in good markets, but have cut back as the markets dipped. Bigger deals won't go away because of the need to restore ever-larger deferred compensation packages.
Prudential Securities has led the way with upfront bonuses of 150% of trailing 12-month production. But the firm is cutting the top-end bonus from 150% to about 100%, says Danny Sarch, a recruiter who runs Sarch Leitner Consultants in White Plains, N.Y. "They're dressing up - preparing to go public," he says. "The deals they were cutting don't make a lot of sense."
Houston recruiter Rick Peterson says some firms will maintain bonuses of around 125% but "the parameters are significant," he says. Desirable brokers need to have managed accounts, a low return on assets and high production.
"There's more flight to quality, more stringency," agrees Mark Elzweig, a recruiter in New York. "If firms are making less, they have less money to spend. They're more careful about whom they recruit. People getting the best deals have 1% turn on assets."
Don't look for the price of brokers to drop too much, Elzweig adds. "Given the level of deferred comp in the business and the very high failure rate of trainees, deals are here to stay. It's the cost of doing business."
Recruiters and consultants expect the move toward beefier deferred comp plans to continue, despite any market slowdown. Not only can a deferred comp program serve as a retention technique, but it can also attract recruits.
One trend is putting a portion of the sign-on bonus into the firm's deferred comp plan, says Andy Tasnady, senior consultant in financial services for The Sibson Consulting Group in New York. "If it's a 100% sign-on, they put 20% to 40% into a deferred plan," he says. "It provides some glue. They can give 100% more easily if some of it is in deferred comp."
Firms are using more company stock in the plans, too. But Tasnady says there's a drawback with that: Brokers take a larger hit in a market turndown, then firms find that "the water level is down in the moat when people are coming to attack.