Smith Barney Changes Payout Grid

Previous rewards for selling funds and annuities are eliminated; producers with more than $300,000 in production will see a bump in compensation.

Smith Barney is altering its compensation system for 2004, with the main goal being to simplify its payouts and make them more product-neutral.

The new grid will eliminate certain existing bonuses for assets under management and a higher payout for selling certain types of products, such as mutual funds, annuities and unit trusts. But it will also increase payouts to any rep with more than $300,000 in gross annual production.

The adjustments, announced to Smith Barney’s 12,000-plus registered representatives late Wednesday, take effect at the beginning of the year, according to officials at the firm. Jeff Hack, Smith Barney CFO, says the changes were made to eliminate legacy grids that had existed from previous mergers (such as Shearson) and to ensure the grid rewards production—and does not favor one product over another.

One of the most tangible changes, for example, is that a producer’s length of service will no longer factor into the initial grid payout—$400,000 in production equals a 40 percent grid payout, no matter how veteran the broker. However, tenure still will be rewarded, through cash and deferred bonuses of up to 3.5 percent in cash and 1 percent in stock. Length of service will be the main determinant of the bonus size, but production also will figure in.

The largest possible compensation a rep could receive is 50.25 percent of production. (Deferring cash compensation for Citigroup stock can push that figure higher.) That would be for an advisor with production of $5 million or more who has been with the firm for at least 10 years. The payout for such a producer would be 43 percent, along with a length-of-service bonus of 3.5 percent. Additional deferred bonuses for production and length of service—payable in Citigroup stock—can total as much as 3.75 percent.

For reps producing less than $300,000, the grid would remain flat. The lowest grid payout will be 25 percent (for reps with less than $125,000 in gross production). The most significant bump in total compensation for a rep with 10 years at the firm will be for those who reach the million-dollar production level: total compensation for these reps will rise from 45.5 percent to 48.5 percent.

“It looks to me like they’re incentivizing the $500,000 producer to get to the million mark that everybody is talking about,” says one producer.

The changes leave some reps concerned. Specifically they worry that the elimination of certain bonuses based on assets, or of those based on selling products such as mutual funds or annuities (proprietary or non-proprietary), will negatively affect their production. Further, there’s concern that the new system might encourage unscrupulous behavior, such as pushing dormant clients to trade even when doing so might not be in their best interest.

Hack says one reason why the asset-based bonuses were eliminated was because it could potentially reflect a bonus for holding large, inactive positions. However, some reps felt that this is a penalty—because the firm can continue to make money on large, inactive accounts.

“Let’s say you’ve got an account with $50 million in cash, which does nothing, but they make money on that,” says one firm veteran. “Essentially you’re telling the broker to push this guy with $50 million to do something—they want the broker to move those assets.”

However, another rep says he believes the changes favor the client, because they ensure advisors aren’t resting on their laurels, “collecting assets and not helping clients.”

Hack estimated that about 10 percent of reps at the firm will be significantly impacted, and those who lose more than $5,000 in net annual pay will be offered a two-year compensation transition. That is, that $5,000 will be paid out for two years while the particular rep changes their business.

E-mail: David A. Gaffen

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