Last month, both UBS Wealth Management and Morgan Stanley Smith Barney unveiled changes in their compensation structures that have branch managers at both firms—many of whom are already disenchanted with the mounting demands and diminished job security of their positions within the industry—even more unhappy.
UBS unveiled a new pay plan for branch managers at a three-day meeting for managers in Salt Lake City in mid-January. Though it included a slight raise in base salary, it also incorporates more subjective measures into the firm’s branch manager pay formula, according to UBS spokeswoman Karina Byrne.
UBS branch managers and complex directors are typically compensated through a combination of salary and bonuses. Bonuses are based upon objective measures— essentially how well managers meet specified goals—as well as a subjective view of their performance. The firm has chosen to place more considerations on the subjective side, UBS Wealth Management Americas CEO Bob McCann announced at a meeting last month.
“For some managers, the end result may be a 25 percent or more cut in total compensation, despite a small rise in base pay,” according to one industry insider who spoke off the record.
Fifty percent of BoM compensation will be tied to a quantitative formula specific to each individual manager, Byrne explained. The subjective half, she said, will be based on four things: Quality of business results, such as revenue growth and same-store net new money penetration; “Delivery across multiple areas of the firm,” including helping financial advisors work with other UBS wealth management, institutional management or investment bank operations, and partnerships with other divisions; Leadership, such as contributions to the community; and Quality of Management, based on things like positive audits and few to no arbitrations or litigations.
“This is where BoMs stand to lose so much money,” said the insider. “None of [the subjective] portion is guaranteed.”
“UBS has always had significant subjective weighting,” Byrne said—stating that the 50-50 breakdown has been in place for a few years. “It’s just that now, subjective portion is a bit broader and harder to define.” It can be especially hard to define "leadership" and "management" in quantitative terms, she acknowledged.
“This as a big pay cut in disguise,” said a UBS branch manager who requested anonymity. “Fifty percent of our compensation is subjective—what does that mean? I think they wanted to cut our compensation, and saying that half will now determined by more subjective criteria lets them get away with it. There’s no real formula here. It seems whatever they want to pay us goes.”
The industry insider also claims UBS put a $1.3 million cap on branch manager earnings, which would affect all of its roughly 30 complex managers. Byrne said there is no actual cap. “That figure would be true if the 50-50 formula was carved in stone, but it isn't,” she said. "It is an average formula. We stated [at the meeting and in our literature] that the subjective component of any branch manager's compensation may be equal to, less than or more than 50 percent at any time-based on his or her performance.” In other words, branch managers who have banner years will have more than 50 percent of their compensation based upon it. There’s no cap on what successful branch managers can make.”
Meanwhile, Over at MSSB
Still, the insider says he’s heard from plenty of BoMs who are extremely unhappy about this. “Many feel it was a premeditated – even underhanded-- way of cutting costs,” he said. “But, I don’t know what recourse they have for the moment. The grass is really no greener for branch managers elsewhere—especially at the other wires.”
Case in point: One week later—on January 21, Morgan Stanley announced that everyone on both the banking and brokerage sides of the firm who gets a substantial bonus (everyone from bankers to traders to branch office managers)—will now be seeing 35 to 50 percent of that bonus deferred, a knowledgeable source from the firm told Registered Rep. magazine. The change will affect 2010 bonus money, which is paid in 2011.
Not surprisingly, BoMs were not happy about the news. “In some cases, bonuses account for as much as 75 percent of a BoMs annual compensation,” said one MSSB BoM who requested anonymity. “This affects money that we’ve already earned, since we don’t get our end-of-year bonus until the new year starts.”
At Morgan Stanley, employee bonuses are comprised of both cash and stock, the source said. Employees due large bonuses will now receive 50 to 65 percent of the cash portion upfront. The balance will be deferred. Of the deferred portion, 25 percent will be paid in July; another 25 percent will be paid in December; and the remaining 50 percent will be paid in July 2012, our source said. (Branch managers—and many other employees who get bonuses—already get 15 to 25 percent of their compensation in stock that typically vests after four years.)
The announcement comes after Morgan Stanley reported a 35 percent increase in fourth-quarter profits, despite a dip this fall in fixed income trading revenues.
Many insiders believe the move reflects the new realities of Wall Street after the financial crisis. The Morgan Stanley source said there’s been a lot of backlash from the public about the high level of Wall Street bonuses. “The deferment process protects the firm and investors against employees who don’t continue to perform as they should,” he said. “It keeps them in check.”
Rick Peterson, who heads Rick Peterson and Associates, a Houston-based industry recruiting firm, and who recruits for Morgan Stanley Smith Barney, says he has not received irate phone calls from MSSB BoMs on this matter. “I usually hear from unhappy BoMs from various firms every day. But, not on this issue. I think everybody realizes this whole industry is being re-priced from the top all the way down.
“Branch managers at every firm are facing this,” he continues, “not even just the wires. And, every firm is doing it a little bit differently.”
Jeanne Branthover, head of Boyden Global Executive Search’s Financial Services Practice, expects deferring bonus comp will become standard practice in the industry. “It’s is very likely the way things are going to be across the board—a ‘Best Practice’ practice for the big firms an attempt to reduce employee's taking unnecessary risk, to allow firms to hold onto their cash longer, and to retain talent through by requiring employees to stay with the firm to receive their full bonuses
It’s also viewed by firms as a way to improve employee performance, she says. The restricted cash awards also are subject to a clawback provision that require recipients to reimburse the firm if the pay is based on profits that later turn out to have been overstated, she explains.
“It’s ridiculous--they’re making us earn our bonuses twice, “said another MSSB BoM who asked not to be identified. “If someone gets fired in early 2011, he won’t be able to get much of the bonus he earned the year before.”
”We have heard employees overall haven’t been happy with seeing more of their compensation deferred,” Branthover says. “But, there seems to be an underlying acceptance since most firms are paying similarly. It is an adjustment the firms are making to satisfy shareholders, the public at large, and the government since the crisis.”
I think it’s a way of indirectly implementing pay cuts, a BOM seeking anonymity told us. “It’s hard to prove because details on the reasons behind bonus deferrals have been a closely-guarded secret and have varied widely from firm to firm,” he said, “which is one of the reasons some regulators are pushing for more specific rules.”
“It would behoove these firms to think about the effect comp changes will have on managers’ morale,” he continued. “That’s the driving force behind the branch and, ultimately, the firm’s success. If a manager feels he won’t be fairly compensated for his successes, his morale will plummet. If a manager starts earning significantly less many than his advisors, which is exactly what I think we’re going to see happen, his morale will plummet even more. If this happens, his branch’s profitability is bound to pay the price.”