Banker Pay Still Killing Shareholders (Update 1)

Updated with additional details on second page from Wednesday's presentation by Goldman Sachs.NEW YORK (TheStreet) --Think moves made by the big banks in slashing Wall Street pay has made any difference? Take a look at fourth quarter earnings from Lazard (LAZ).

The investment bank's inability to rein in compensation may be a sign of trouble ahead for larger rivals like Goldman Sachs ( GS) and Morgan Stanley ( MS) that have been credited with showing discipline on pay.

At Lazard, compensation was the main drag on the company's fourth-quarter earnings, which missed analysts' estimates by a wide margin. While analysts had been looking for a profit of 37 cents per share, Lazard earned just a penny at best, or lost 4 cents "depending on how one counts it," as Oppenheimer analyst Chris Kotowski put it in a research note.

Kotowski, who had been looking for an above-consensus profit of 45 cents per share, described Lazard's results as "perhaps the most disappointing earnings report that we have seen in the past three years."

Bank of America Merrill Lynch analyst Guy Moszkowski also chimed in with a note on Monday, writing that "investors have clearly been frustrated over time with the company's inability to bring its reported comp/ revenue ratio to, or below, the targeted average 57.5% for all but brief, peak-y periods."

Lazard Chairman and CEO Ken Jacobs addressed the issue at length on a call with analysts Monday.

"We are committed to growing awarded compensation at a slower rate than revenue growth. We accomplished this in 2009 and 2010," he said.

Investors weren't satisfied. They drove Lazard shares down 6.6% this week through Tuesday, even as financial stocks rallied as a group.

A company spokeswoman did not return a call seeking comment.

Rochdale Securities analyst Richard Bove said Lazard's problem is compensation deferred from previous years, much of it awarded under Jacobs' predecessor Bruce Wasserstein, who died in 2009.

"Wasserstein was in this battle to take over control of Lazard. He put out a lot of deferred compensation to a bunch of people," Bove says. Indeed, payments to the Wasserstein estate have eaten up a big chunk of Lazard's earnings, according to Bove and published reports.

"They're sucking in the cost of these deferred compensation plans. They got hit really hard in 2011 and they're going to get hit really hard again in 2012, which means that while the goal is to get the thing under 50%, that's not likely to occur until 2013," Bove says.

Bove argues Lazard chief Jacobs "is doing everything possible to get control of his compensation system but in my view he's just stuck. He's stuck with all the stuff that Wasserstein left him."

The problem isn't unique to Lazard, according to Bove, who says Morgan Stanley, Goldman Sachs, Evercore ( EVR) and Jefferies ( JEF) all have hefty deferred compensation costs that will weigh on earnings in future years.

"They've been offering these deferred compensation packages since they've been trying to get their current compensation down" to address political pressures, he says.

The golden rule in investment banking has long been that compensation should not exceed 50% of revenues, but Lazard has struggled to hit its even less ambitious goal of "mid- to high-50s," as stated by CEO Ken Jacobs during the firm's earnings call on Monday.

The company accrued compensation at more than 72% of revenues in the fourth quarter, bringing the total for 2011 to 62%, according to Kotowski's research.

By contrast, Goldman Sachs handily beat analyst estimates by tightening compensation in the fourth quarter.

Goldman accrued compensation at 36.5% of revenues in the fourth quarter. Still, while revenues fell by 26% in 2011, it only managed to trim compensation by 21%, according to a slide presentation Goldman gave at the Credit Suisse financial services forum on Wednesday. In 2010, when revenues fell by 13%, pay came down by just 5%. The big outlier was 2009, when Goldman grew revenues by a whopping 103% coming out of the 2008 crisis but grew pay by "just" 48% in response to widespread public outrage.

Morgan Stanley ( MS) paid out 57% of revenues in the fourth quarter, but it had been more conservative in the third quarter, accruing at just 37.3% of revenues, according to Kotowski.

Morgan Stanley has also made a dramatic gesture of capping cash bonuses at $125,000 in the first year, though the move may be more powerful as a symbol than anything else.

Morgan Stanley CEO James Gorman also got lots of attention for compensation-related comments he made at Davos, saying unhappy executives were free to leave.

Even so, Goldman and Morgan Stanley may only be putting off their problems for future years, as Lazard's fourth quarter difficulties demonstrate.

Not so, says Morgan Stanley's Gorman, who addressed the issue on the fourth quarter earnings call, saying "2011 represented a high water-mark for our deferrals due to the unusual aggregation of prior periods into this year." He went on to say the bank is acutely aware of the impact of deferral decisions on future periods, but with the last years behind us, we will have more flexibility in the years to come."

Deferred compensation is also worth watching for Bank of America ( BAC), JPMorgan Chase ( JPM) and Citigroup ( C), though because the investment banking operations are housed in larger institutions the potential drag on earnings isn't as great.

Bank of America and Citigroup both paid roughly 35% of revenues to employees in the third and fourth quarters, according to Kotowski's research.

Bank of America is also reported to have capped bonuses or possibly even done away with them entirely. The bank has declined to comment on the matter.

Calls to spokespeople for Jefferies and Evercore and email messages sent to spokespeople at Goldman, Bank of America, Citigroup and JPMorgan were not immediately returned.

-- Written by Dan Freed in New York.

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