Merrill Lynch's pay plan for 2018 is stirring opposition among some veteran brokers, underscoring tensions in an industry that faces growing competitive pressure and an aging workforce.
Bank of America Corp.'s wealth-management arm told its ranks last week that compensation would be revamped for 2018 in a way that rewards brokers with up to 2% of the revenue they generate for hitting certain growth and referral targets and punishes them by up to 2% for missing them, while shifting 1% of most brokers' pay from cash to deferred compensation.
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Together the changes -- which the bank says are designed to accelerate asset growth and product referrals -- mean the best-case scenario for 2018 compensation for most brokers is a 1% increase from 2017 in the revenue they keep and the worst-case outcome is a 3% reduction. Some veteran brokers say the growth hurdles are high and make it likely that pay will fall for many next year.
While compensating for growth is nothing new, the penalty for missing targets is controversial because sometimes high performers have a tough year due to market conditions or other factors, said Glenn Schorr, a brokerage industry analyst at Evercore ISI. "The stick is new to wealth management on Wall Street," he said, adding that its introduction "will bother people."
Merrill Lynch officials defended the new compensation strategy. "The plan is growth-oriented, aligned with our growth initiatives and designed so that clients, shareholders and advisers benefit," said Andy Sieg, head of Merrill Lynch Wealth Management.
Here's how the new pay program will work: Brokers will have the opportunity to earn 2% in 2018 upon clearing two hurdles -- 5% growth in client assets and liabilities from the prior year, which can come from any mix of products from stocks to mortgages, and the opening of at least five new affluent-household accounts that have a minimum of $250,000 of investable assets at Merrill. Alternatively, the broker can bring in two new household clients with at least $10 million in investable assets at the firm.
Brokers who don't meet minimum targets of 2.5% asset-and-liability growth, plus the addition of either three affluent households or one ultrahigh-net-worth household, would slide down the grid and see pay fall by up to 2%.
To gain access to the bonus system, brokers need to make at least two client referrals to the parent bank. This is a change from last year, when brokers were directly penalized for not making at least two referrals.
Merrill Lynch, which assigns payout rates based on the amount of revenue a broker generates from fees and commissions, said in its most recent quarter that experienced brokers on average pulled in $1.3 million in annual revenue. A broker producing that much next year will keep 42% of that in cash, or $546,000, down from 43%, or $559,000, in 2017. The difference is that 1% is shifted to deferred compensation, which takes up to eight years to vest.
Yet if one of the growth targets is hit, pay in 2018 will stay even with last year's $559,000. If both are achieved, pay rises to $572,000. If both targets are missed, pay falls to $520,000.
One veteran broker who was asked by Merrill to weigh in before the compensation changes were unveiled said he expects to earn 51% of the revenue he generates next year, up from 49% in 2017.
But some higher-producing brokers say they are perplexed by the changes, particularly for brokers who generate the lowest amount of revenue. The firm eliminated the so-called penalty box, meaning brokers who bring in less than $350,000, will see their pay rise to between 34% and 35% of revenue from 20% to 25% in 2017. These brokers can also earn the 2% additional pay for reaching growth hurdles.
"It's a weird giveaway," one Merrill broker said. "Why are they rewarding low producers and taking away from the top?"
The reason, say some observers, is because Merrill is trying to retain and groom its younger ranks into more successful brokers at a time when the industry faces an aging workforce, a recruitment retrenchment and growing demand for technology-driven advice. Paying more at the bottom gives "breathing room" to brokers just starting out, said Andy Tasnady, an industry consultant who helped develop Merrill Lynch's 2018 pay plan.
"The expense there is tiny relative to the overall program," said a person familiar with the changes. The person added that the penalty box had been meant to encourage growth but wasn't successful at doing so.
Still, some seasoned brokers say they feel jilted. A longtime Merrill broker said the 5% net-asset-growth hurdle will be difficult for many but the lowest performers to achieve, as they have a lower baseline going into 2018.
"They want the old guys out," the broker said. "I feel like an auto worker on an assembly line being replaced by a machine."
Write to Lisa Beilfuss at email@example.com
(END) Dow Jones Newswires
November 16, 2017 09:14 ET (14:14 GMT)