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Wall Street News

Merrill Freezes Broker Recruiting Bonuses – Are Traders, Bankers Next?

May 15, 2017

By Howard Haykin


Beginning in June, Merrill Lynch stop offering recruiting bonuses to attract experienced brokers. That’s along the same lines as UBS which, in 2016, announced that its wealth management unit would reduce by 40% the number of brokers it poaches annually. UBS says it will use the saved money to better compensate its existing sales force.


Under its new plan, Merrill will recruit brokers with between 3 and 8 years' experience, and offer no upfront nor back-end bonuses. Instead, the firm will provide 3 years of guaranteed base salary, plus an additional payout based on production, and perhaps a bonus. After 3 years, those same brokers will be paid a percentage of their production, plus any incentive bonuses the firm may offer for new assets and lending, along with

other activities.


It now remains to be seen whether other large retail brokerage operations – most notably, Morgan Stanley – will follow suit.


WHERE MIGHT THE INDUSTRY GO FROM HERE?    While it’s unlikely that banks and broker-dealers can be inspired to change its compensation arrangements in such units as trading and investment banking, it doesn’t prevent us from considering the possibilities. And, of course, our thoughts are driven by a long-held conviction that compensation in financial services is far from being a level playing field.


True, serious compensation, comes in the form of annual bonuses, and the opportunity for outsized bonuses reside for the most part with traders and investment bankers – which, in some ways, we understand because they’re the ones who bring in the revenues. Yet, there’s room for improving the way bonuses are computed and allocated – if nothing else than to theoretically level the compensation playing field. Here are a couple of thoughts:


Carve-Outs.   Let’s give traders and bankers their due, but first carve out trading gains and banking fees that can be attributed to positive external market and economic conditions. For example, …


  • It’s not extraordinary for banking fees to significantly rise when the economy is running on all cylinders. Likewise, trading gains are easier to come by when the markets are volatile – regardless of their direction.
  • Conversely, economic recessions and stagnations can dampen banking efforts, while non-volatile markets make trading difficult at best.
  • In these cases, it would fair to base bonuses more on any value-added services or efforts that a banker or trader provides.


Firm-Wide Basis.    Once upon a time, bonuses were computed and allocated on a firm-wide basis. With certain exceptions, when a firm, as a whole, was profitable then all employees shared in the spoils. It’s how teams and teamwork operate. For example, …


  • It’s not unusual for trading and investment banking to take turns ‘carrying the load’ for the firm.
  • In such cases, how is it fair that the ‘business unit du jour’ might get significant bonuses, when other units flounder. This approach promotes a selfish and self-centered mentality that is a disservice to all but the ones receiving the bonuses.
  • Corny as it may sound, but what’s wrong with a “one-for-all and all-for-one” firm philosophy.


We know that this rationale exists at some firms, and it’s our hope that they’re benefiting from the experience – if nothing more, they’ve got peace of mind.