Smith Barney Changes Payout Grid
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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