Brokers Jump Hurdles To Get Full Bonuses

(Dow Jones) As Wall Street's signing bonuses for brokers soar ever higher, the strings tying them down are getting thicker.

Recruiting packages are the talk of the industry, with some top advisors now getting ones from the big brokerages that total as much as three times a year's production in fees and commissions from clients.

That means companies won't make a profit on their business for several years. To ensure some eventual return, they insist on building bigger performance hurdles and restrictions into the contracts, which themselves are getting longer.

Upfront bonuses have long been given in the form of a loan that is forgivable over a number of years. If the advisor leaves for another firm during the term of the contract, he or she must pay back a proportionate share of the money.

In the biggest packages, more of the money is coming at the so-called "back end"--that is, not upfront--and is tied to how well the broker performs. They are also dragging out the vesting periods of deferred compensation so brokers will stay put longer.

At about 300% of production, the bonuses are hitting a ceiling, "but they still can be profitable" if the banks structure the deals properly, said Scott Smith, brokerage analyst at Cerulli.

Of course, ceilings are relative. In the mid-1990s, bonuses appeared out of control when they rose to 50% from 25%, triggering a special industry commission, the Tully Commission, to investigate whether investors' interests were being compromised. Seeming to defy business logic, bonuses have continued to rise steadily, dipping only temporarily after the tech stock "bubble" burst in 2001. The 2007 financial crisis only added to incentives as banks, with their other lines of business suffering, were desperate to bring in new client money.

The firms did try to lower signing bonuses at the end of 2009 and in early 2010 but found that brokers refused to move over for less money, said Mindy Diamond, recruiter and president of Diamond Consulting. So the four major firms--Merrill Lynch, Morgan Stanley Smith Barney, Wells Fargo Advisors and UBS Wealth Management Americas--are toughening the structure of the bonuses instead.

"It's not all upfront, it's not all cash, and it's over a nine-year contract," Diamond said. "On the back end, it's more of a performance bonus than a signing bonus."

A few years ago, bonuses were structured with almost all the money in cash up front and just a little extra on the back end. One Merrill Lynch broker, who moved over from UBS in early 2008, recalls his package was relatively simple. "Our deal had practically no performance hurdles attached to it," he said. "Now, all the deals are asset-triggered."

In the biggest packages, the advisors get only about half their bonus in cash upfront when they join. The rest comes when, and if, they bring over client assets and reach the production levels they boasted at their previous firm within a certain time frame. They hit the full jackpot only when they grow their business past that.

"You have you to be in growth mode to get that extra bonus. They can't just walk in, sit for a few years and walk off in to the sunset," Diamond said.

The Merrill Lynch broker, who manages a branch and recruits other advisers, said new hires lately receive, at most, 150% of production upfront. They get another 60% if they bring 60% of their assets in a year. If they meet a second hurdle of 90% of their original assets after two years, they hit another 50% payout, and so on.

Another broker, who used to work for Merrill Lynch and moved to Morgan Stanley at the beginning of 2009, said his deal was 120% of production upfront with a nine-year commitment, with the chance to earn about another 100% in deferred compensation if he meets all the hurdles.

He believes it was a good deal for Morgan Stanley. "It's cheaper to pay me than to take a chance on some rookie, especially in this day and age," he said.

Alan Johnson, compensation consultant at Johnson & Associates, believes signing bonuses "take forever to be profitable" for the company. But the terms of the new contracts do help them ensure they won't too much on a bad hire.

The strict terms encourage brokers to work hard and not rest on their laurels, while extending the vesting periods on the deferred compensation helps to ensure the firm benefits over time from that hard work. For most deals these days, the clock doesn't start on vesting when they're hired, but instead when they meet the production benchmarks.

Brokers often exaggerate their production when they are being recruited, Johnson noted. "So it's very important to have those check-ins along the way to ensure that they make as much as they said they can," he said. "It puts more accountability in the system."

The brokerages are scrambling to find ways to justify the sums they promise, said Danny Sarch, recruiter and president of Leitner Sarch Consulting. "The fact that it's harder to make an economic model showing profitability of these deals speaks to how intense the compensation is getting."