Morgan Stanley offers $3 billion broker bonuses, Wells none (TARP $$$ involved)

[UpInArms]

Source: Reuters

NEW YORK (Reuters) - Morgan Stanley's (MS.N) brokerage joint venture with Citigroup Inc (C.N) will pay brokers as much as $3 billion to stay on, while Wells Fargo & Co (WFC.N) will not offer retention payouts to brokers from the former Wachovia Corp.

Retention bonuses are often paid to keep brokers from defecting after a company is bought. Financial companies, however, are facing strong criticism from Congress and regulators to limit pay in the wake of heavy credit-related losses and large taxpayer-funded infusions into the sector.

Brokers at Morgan Stanley and Citigroup's Smith Barney unit who produce at least $1.75 million of revenue may be eligible for a payment equal to 105 percent of their annual production, according to a person familiar with the plan.

About 6,500 of the combined entity's 20,000 brokers are expected to be eligible for the retention package, with the first payment in January 2010 and the second in 2012, the person said. Overall retention bonuses could total $2 billion to $3 billion, the person said.

Citigroup and Morgan Stanley together received $55 billion of capital infusions from the government's Troubled Asset Relief Program.

Read more: http://www.reuters.com/article/ousiv/idUSTRE51K07120090221

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Brokers at Morgan Stanley and Citigroup's Smith Barney unit who produce at least $1.75 million of revenue may be eligible for a payment equal to 105 percent of their annual production, according to a person familiar with the plan.

If you pay out all the revenue in a bonus, how does that work???? Then you had no income from this broker at all!

I call BS!

edited to strike my opinion - thanks to alcibiades_mystery for clarification.

[alcibiades_mystery]

1. It works because you retain their production over a number of years

The math is not that hard:

$2 million over 5 years = $10 million (5 year income)
$2 million X 105% = $2,100,000 (1 time retention pay-out)

Net for the company over 5 years = $7,900,000

These retention bonuses are generally structured as forgivable loans that are forgiven over a number of years in order to lock in the production income well over and above the retention pay-out. So, for example, if our broker who received $2,100,000 leaves after two years, he will have to pay back maybe $1,300,000 of the loan, the first $800,000 having been forgiven at a rate of $400,000 per year. But even if he does this, we have production in the amount of

$2 million X 2 years = $4 million

In other words, even if the broker leaves after 2 years, the company still made $3.2 million off the deal ($4 million in production income minus $800,000 in the forgivable loan).

These aren't, then, really bonuses. They are transactions.

Of course, the article doesn't say that because it is merely trying to inflame passions, rather than explain what is really going on. Morgan/Smith Barney is losing brokers in droves to poachers, particularly a strong recruiting drive by UBS, so they're losing that $10 million over 5 years completely.

[UpInArms]

2. thanks for the clarification on that -

and you're right, the way the article is written, it does inflame - I do hate poor journalism.

:hi:

[WriteDown]

3. Wow....

It's rare to see a poster who actually understands finance. Thanks! :)

[RUMMYisFROSTED]

5. I've got a beef with the $2M per year salary; forget about the bonus. nt

[alcibiades_mystery]

6. The $2 million a year is the production

It's what they bring in for the company.

I chose it because it is a round number, and the article states that retention payments are mainly targetted at those bringing in more than $1.75 million a year.

It is not the salary. You apparently don't understand what "production" means in this context.

[RUMMYisFROSTED]

7. Average broker pay is $300K a year, plus $60K retention bonus.

$360K a year. (Top 25 hedgefunders averaged $250M per year)

For a $5T hole in the ground and an ever-widening income gap.

How's that working out for us?

[alcibiades_mystery]

10. That's neither here nor there

I was explaining how it makes sense for a firm to pay retention bonuses to brokers. If you want to discuss the relative merits of salary disparity in society, that would seem like another conversation altogether.

[RUMMYisFROSTED]

11. The point is that who else gets a yearly 21% bonus for retention of their services?

Especially when their base pay is 600% of the average salary.

A worker making $50K also provides retainable services. If their value to the company didn't exceed their salary they wouldn't have a job. Many times that value is an order of magnitude of their base salary, like said brokers. Yet how many get $10.5K retention bonuses every year? Why does it make fiscal sense for a brokerage firm yet not for, say, a trucking company? Not to mention, said worker is most likely providing an actual good or service while the broker is involved in an highly dubious enterprise (see: $5T hole and widening income gap between the working and investor classes).


Explain how it makes sense for one and not the other.

[alcibiades_mystery]

12. Because there's a market for it

It's not much more complicated than that. If nobody was trying to poach the good brokers away, there would be no retention bonuses. I don't see why people are finding this hard to fathom. The same thing happens with hairdressers, chefs, and numerous other professions where the real work is in establishing relationships of trust through reputation. None of this is exclusive to retail brokerage or wealth management.

[RUMMYisFROSTED]

13. No one said anything about exclusivity. But I contend it is much rarer

than you make it out to be. And, as I noted previously, hairdressers and chefs provide an actual service and are generally not compensated to the tune of $300K a year while receiving yearly $60K bonuses.

You'll find these compensation packages in what I'll call the "Buffer Class." The professional class(bankers, brokers, attorneys) whose main responsibility is to protect and enhance the mainly inherited wealth of the gentry. The better that wealth is protected, the better the bonus. Table scraps.

So there is definately a market for it. I understand that. I'm just calling bullshit on it. It's a way of co-opting the buffer class with relative table scraps in order to maintain a lifestyle. Bigger pay/bonuses for bigger risks inculcates an environment of greed and moral turpitude.

Your argument that it is a system put into place to prevent the poaching of good brokers is laid to rest by the fact that the "good brokers" receiving bonuses today are the very ones who gamed the system that put us in our present predicament. I submit that the bonuses are actually a way of limiting the downward distribution of wealth- "If we can't keep all the money, lets give it to our guardians instead."

[alcibiades_mystery]

14. The problem was not among brokers

But investment bankers.

None of these companies pay retention bonuses to brokers they don't think will make money for them. It's a business transaction.

Fetishizing the goods and services commodity will get you nowhere. From a standpoint of value, they are just as idealized as the airy investment, as Marx clearly demonstrated.

[RUMMYisFROSTED]

15. Brokers didn't push CDS?

My bad.

/

[alcibiades_mystery]

16. So, you really think that these companies are paying out brokers

who don't produce income for the companies over and above the payouts?

And generally, you don't buy credit default swaps at retail brokerage. They were transactions between banks.

[RUMMYisFROSTED]

17. No.

From post #11:

If their value to the company didn't exceed their salary they wouldn't have a job. Many times that value is an order of magnitude of their base salary, like said brokers.

As for the CDS, publicly traded stocks of Citi and AIG were rife with them. If you're suggesting that brokers knew not of the inherent risk of such instruments and the companies that utilized them, that's your prerogative.

[tooko13]

8. questions

So the broker receives a one time bonus, based on past
performance that is equal to some % of what they have brought
in for the organization over a time span.  This bonus could
equal over 100% of what the individual brings into the company
for a given year.  I have several questions  1) what if they
do not continue making money or at least as much money for the
organization...do they then need to pay some of the bonus
back?  2) wouldn't it make more sense to put the bonus out in
front as a carrot somehow, something they need to strive for? 
3)why do people need transactions / bonuses for doing their
JOBS? To me it seems like an unnecessary practice that may
lead people to be more likely to make bad decisions (illegal)
in an effort to get more money in a transaction / bonus.  

[alcibiades_mystery]

9. Answers

1) what if they do not continue making money or at least as much money for the organization...do they then need to pay some of the bonus back?

Probably not, but that's the risk of the transaction. That's where the broker has to sell the deal to the company: the retention and future earnings potential. No transaction is risk-free, after all.

2) wouldn't it make more sense to put the bonus out in front as a carrot somehow, something they need to strive for?

It would make sense, as would any deal that favors one party. The question is whether brokers would go for that deal, and what other parties are offering. These are retention incentives, not bonuses. But on the other side is "walking across the street" money: the offer of some other firm. So let's say Firm A says "We'll give you $2 million in five years if you do good," and Firm B says "We'll give you $2 million now forgivable over five years," you'd be a fool not to take the second deal, and Firm B would be foolish not to offer it, if they are confident in your earnings over five years. And if Firm B poaches enough brokers from Firm A with this deal, then Firm A better damn well adjust their offer or they're going to lose all their talented producers. There is a market, in other words. What makes sense in the market is what the market produces as the best deal for all parties, not just one.

3)why do people need transactions / bonuses for doing their JOBS? To me it seems like an unnecessary practice that may lead people to be more likely to make bad decisions (illegal) in an effort to get more money in a transaction / bonus.

Brokers are in a strange category, because they are pseudo-independent entities operating within firms. Essentially, this is no different from a hairdresser, who can also leave and bring clients with them to a new firm (indeed, the exact same structure of retention bonuses and buy-away's happens in that industry, without the Reuters coverage). The brokers, given the structure of the job, OWN the client relationships. Not de jure, but de facto. People put money in with people who they TRUST (just as people settle in to a hairdresser whom they trust). A good broker establishes those relationships of trust. So they are not being paid more for simply "doing their jobs;" they have a valuable commodity that is worth money on the market (the trust relationships they've established). So, they are being paid to keep their trust-relationships at a particular firm. There's nothing wrong with that. In fact, this structure incentivizes brokers to fly straight with clients, since the client's TRUST is the commodity being traded.

By the way, the current crisis does not originate in retail brokerage and wealth management, but on the investment banking side.

[Double T]

4. No wonder wall street brokerage units are full of corruption, malfeasance and...........

multitudes of criminal financial instruments. I agreed with you PREVIOUSLY, it is BS! Incidentally, UBS is under investigation for hiding its US customers $$$$$ in Swiss Bank Accounts; that's OK as long as some corrupt investment bank, its traders and investors are making money. wall street is an absolute culture of corruption with proof and not BS to back it up; performance and retention bonuses are only part of the problem.