For better or worse, boutique investment house Lazard Ltd. continues to pay employees most of their bonuses upfront, rather than deferring big portions of pay to future years as some rivals have done.
And it is also continuing to hire when other firms are shedding personnel, reasoning that top talent is less costly just now.
Light was shed on Lazard’s compensation and hiring structure when the firm announced this week that it lost $4.8 million, or four cents per share, during the fourth quarter of 2011, compared with a profit of $99.9 million a year earlier.
Reuters reports that the firm’s compensation costs have remained high due in part to management's decision to pay employees most of their bonuses immediately, rather than deferring big portions of pay to future years as some of its competitors have.
Lazard did cut discretionary bonuses by a full 20 percent last year based on its weaker revenue, but its compensation costs remained high because the investment bank opted to defer only 23.5 percent of pay to later years.
Lazard Chief Executive Kenneth Jacobs told Reuters: "We are very comfortable with our approach on deferrals at the firm and we didn't need to increase it." He added, "There's just no free lunch there."
According to Jacobs, some parts of Lazard’s business are doing better. This year, Lazard's asset management business has benefited from a rebound in market values and its advisory business has received an increasing flow of mandates.
Reuters says Lazard is less sensitive to volatile market conditions than some of its larger Wall Street peers because it does not have a trading business and is not subject to many new, profit-crimping regulations that affect trading and capital levels. Yet as an advisory firm and asset manager, Lazard was not immune to the twists and turns of the equity and debt markets last year. Because it has been hiring stars from other Wall Street firms that have cut staff and reigned in bonuses, Lazard's pay costs have remained higher than many other investment banks.
"Our view in regards to hiring has always been: you do it when [other] people aren't," Jacobs said in a conference call with analysts, observing that top talent is cheaper in a weak job market.
Still, earnings disappointed based on analysts’ expectations. According to Thomson Reuters I/B/E/S, excluding special items, Lazard earned a penny a share. On that basis, analysts' average forecast was a profit of 37 cents.
Lazard's 2011 compensation costs of $1.2 billion represented 63.9 percent of its full-year net revenue, up from 62.7 percent in 2010. That compares to 2011 compensation ratios of 50.6 percent at Morgan Stanley, 42.4 percent at Goldman Sachs Group Inc. and 33.8 percent at JPMorgan Chase & Co.'s investment bank.
Citi analyst Keith Horowitz said compensation was the largest driver of Lazard's earnings miss.
Lazard said it aims to reduce its compensation ratio to a "high-50s percentage range" by raising compensation at a slower rate than revenue when market conditions improve.