Prudence Pays Off for Jefferies—and Its Workers

Interesting article from the WSJ:

By MICHAEL CORKERY

While employees at the likes of Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. quiver at pronouncements from Washington, the bankers and traders of Jefferies Group Inc. are happily avoiding the fray.

Complicated stock clawbacks? Not at Jefferies. The New York securities firm has no plans to take back shares from rank-and-file employees. Chief Executive Richard Handler also isn't giving up a potential $12 million bonus this year. His target compensation for 2010 is $26 million depending on whether he can achieve certain performance goals and whether the board signs off on it.

Jefferies, which specializes in trading debt and stocks, didn't take government rescue funds. Nor does it handle consumer bank deposits. During the crisis, it kept a clean balance sheet and relatively low leverage. Its size—revenue about one-tenth that of Morgan Stanley—has also helped it fly below the radar.

Jefferies has a reputation as a scrapper, willing to take on difficult clients such as financier Carl Icahn. The firm is sensitive about its reputation, asking via email that certain terms not be used to describe it, such as "small" and "boutique." Mr. Handler declined to be photographed for this article.

But now its perch outside the Wall Street pecking order is something of an advantage in the market for financial-industry talent. The question for the 47-year-old firm is whether that is just short term, or can be used to build something more lasting.

"We can pay our people what they deserve to be paid," Mr. Handler said in an interview from his sparse New York office overlooking Jefferies's trading floor. "We are only beholden to our shareholders."

Such a notion sounds almost quaint these days on Wall Street, where large firms have been trying to douse a political firestorm over bonuses. Former Morgan Stanley's CEO John Mack forfeited a bonus for the past three years, while Goldman's top executives agreed to take bonuses in all stock. Mr. Handler took no bonus in 2007 as the market was starting to sour and in 2008 when the firm reported a loss. Jefferies reported a $280 million profit last year. Mr. Handler, who owns a sizable stake of the company, says he has never sold any stock except for charitable purposes.

The political climate hasn't stopped some large firms from paying record bonuses this year. But in some cases, it has injected a level of uncertainty about how and when employees will be paid.

"Compensation transparency," as Mr. Handler calls it, is a key part of Jefferies campaign to hire employees away from the largest investment firms. What that really means for many new recruits: More cash, less stock.

A Jefferies employee earning about $1 million, for example, is going to be paid on average of about 85% in cash and 15% in stock. The more an employee earns, typically the higher his stock component.

Rob Harteveldt, who came to Jefferies from Bear Stearns shortly after Bear's collapse and fire sale in 2008, said his friends at large banks say that compensation issues are contributing to "angst and frustration."

"A lot of people stuck around at the big firms because they knew it had been a good year, but now many are being told they are going to get paid mostly in some complicated restricted stock units," said Mr. Harteveldt, who runs Jefferies's high yield, convertible and bank debt sales and trading unit. That has caused his "phone to start ringing again" as employees look to jump ship.

Since the crisis, Jefferies has been on hiring spree, snapping up a mortgage team from Royal Bank of Scotland Group PLC, the high-yield-debt team from Bear and much of the health-care investment-banking team from UBS AG, including well-known and sometimes-controversial banker Benjamin Lorello.

Jefferies's staff has grown 16% to 2,628 since 2006. Goldman, by comparison, employs 32,500.

The financial crisis still took a toll on Jefferies. During 2008, its compensation totaled a disproportionally large portion of its depressed revenue. Today, that ratio has come down to about 55%, as the firm's revenue and profit have risen.

Jefferies workers are each being paid an average of $455,000 for last year. That compares to an average per employee compensation of about $498,000 at Goldman, which has a comp ratio of 35.8%.

Driving much of Jefferies's success during 2009 was the overall trading climate, which offered historic bond spreads and a sharp rally in stocks. Jefferies's investment-banking revenue also rose to $193 million in the fourth quarter.

But like any trading business, the firm could be prone to big revenue swings.

Mr. Lorello, who runs Jefferies's investment-banking unit, said he decided to leave UBS because "Jefferies is one of the last opportunities to be part of the building of a major securities firm."

For his part, Mr. Handler is vowing caution. His desktop was clear except for four blinking trading screens. There were no family photos or knickknacks.

"When I say morale is solid, we are not going around giving high fives saying look how much we made compared to last year," Mr. Handler says. "If you have to tell your people not to flaunt your wealth, then you may have the wrong people. If you are in our industry and don't realize that you are vastly overpaid and you are one of the luckiest people in the world, then your day is coming."

Full article below:

http://online.wsj.com/article/SB10001424052748704…