Rick Peterson & AssociatesRick Peterson & Associates

By Charles Gasparino, Staff Reporter of The Wall Street Journal

July 20, 2000

The golden handcuffs tying many of PaineWebber Group Inc.’s 8,554 brokers to the firm suddenly have been unlocked, and the brokerage powerhouse is scrambling to prevent losing some of its biggest producers.

One little-noticed aspect of PaineWebber’s sale last week to Swiss financial giant UBS AG has been its effect on restricted stock, options and other shares held by many of PaineWebber’s brokers. These shares typically take years to “vest”; that is, brokers can cash in the shares only if they stay at the firm for an extended period of time.

But under the terms of the UBS-PaineWebber deal, the shares vest when the deal closes in November (such vesting is common in mergers). This means PaineWebber risks having its brokers bolt to rivals if firm officials can’t provide additional incentives for them to stay.

“If brokers want to leave, there’s nothing in this deal to make them stay unless they see in the next few months that the new firm is a much better investment firm-and that has yet to be answered,” says Rick Peterson, a brokerage recruiter in Houston. “There’s an awful lot of anxiety there.”

So PaineWebber officials plan to act quickly. As early as Thursday, PaineWebber President Joseph Grano and Mark Sutton, its brokerage chief, plan to unveil a retention package in a bid to persuade brokers to stay. UBS has set aside a $875 million retention pool to help keep talent from fleeing to other firms.

A PaineWebber spokesman declined to comment on specifics of the retention plan; neither Mr. Grano nor Mr. Sutton would comment on the matter. But PaineWebber brokers say they have heard the firm will offer a package in which they will receive as much as 40% of their total production for a year in stock, payable over around three years.

This would “lock in” brokers for long enough to make the deal a success, a PaineWebber official says. And it mirrors the move PaineWebber made when it bought Kidder, Peabody & Co. in 1994; then, it offered some brokers a retention package of stock and cash totaling about 40% of their trailing 12-month production, according to people familiar with the matter.

To be sure, there are reasons why PaineWebber brokers might want to stick around as the UBS deal takes shape. In the past, the firm has had a small investment-banking unit, so brokers largely were deprived of selling initial public offerings of stock to their clients. UBS has a much bigger investment-banking presence. And UBS’s global reach could allow PaineWebber brokers to sell a broader variety of investments, including derivatives.

Nevertheless, the threat of brokers leaving the newly combined firm presents a major challenge to executives in their efforts to make the $10 billion deal work. For UBS, PaineWebber’s massive brokerage sales force was the most valuable asset PaineWebber had to offer.

The combined entity also has to worry about productive longtime employees whose shares are already vested. These employees may now leave because PaineWebber’s long depressed stock price has surged due to the merger.

Escalating Battle

All this comes amid a continuing recruiting war for brokers on Wall Street. Nearly all major securities firms have engaged in an escalating battle to snatch rival producers, often with multimilliondollar signing bonuses. And with their restricted stock vesting, brokers have less of an incentive to stay put — and work for a U.S. brokerage firm that is now run by a Swiss financial conglomerate.

PaineWebber has one of Wall Street’s most productive brokerage forces. Excluding trainees, its brokers’ average 1999 production was $513,000. So, what are the odds the firm keeps its top talent?

“It all depends on what the retention package is,” says Michael King, a veteran broker recruiter in New York. “If the retention package isn’t good, you’ll have some people leaving.”

PaineWebber officials are sensitive to the issue. Soon after the UBS merger was announced, Mr. Sutton heard an earful during the meeting with some of the firm’s best brokers. They wanted to know how much money would they receive to stay at the firm, given the generous pay package given to PaineWebber Chief Executive Officer Donald Marron to remain. Mr. Sutton declined to comment.

As reported, Mr. Marron will receive $60 million over a three-year period, as well as a retirement package, and a “survivor package” for his wife. Mr. Marron’s stock, under the purchase price of the deal, is now valued at about $200 million, and he will be paid fees for running a private equity fund.

Separate Brokerage Unit

The acrimony didn’t stop there. A group of big-producing brokers and private bankers at UBS have asked Mr. Sutton if they can market themselves as a separate brokerage unit, without using the PaineWebber name, according to people with knowledge of the matter. These executives, who produce $50 million to $60 million a year in commissions, have let it be known that they may leave the firm if they aren’t compensated in some way under the retention plan.

PaineWebber is viewed as among the most aggressive firms on Wall Street in terms of both recruiting brokers at other firms with big up-front pay packages, as well as preventing rivals from snatching its own heavy hitters. Just Wednesday, Mr. Sutton said at a media briefing that the firm wants to increase its sales force to about 10,000 in 2003 from 8,554 currently. That means the firm will continue to entice brokers to join the firm, or the firm may buy smaller brokerage outfits.

Recruiting rivals has become a high-stakes game. When PaineWebber set out to hire a top-producing broker team last summer from Merrill, it spared no expense. The brokers were flown to New York first class, courted by senior PaineWebber executives, including Mr. Marron, and treated to a private dinner at the Waldorf Astoria Hotel. Between bottles of fine wine, PaineWebber’s Mr. Sutton made an offer the four brokers couldn’t refuse: a signing bonus totaling $5.25 million, plus $2 million more if they could bring more customers to PaineWebber.

After the UBS merger pact, PaineWebber clearly is seeking to take the offensive to keep its best brokers. In the past, the firm has played a more defensive game.

In May, for instance, PaineWebber took the unusual step of suing Morgan Stanley Dean Witter & Co in a state court in Nashville, Tenn., accusing the firm of a “carefully planned, broad-based campaign to raid” brokers after the firm purchased J.C. Bradford & Co. in late April. A Morgan Stanley spokesman declined to comment.

This legal tactic has worked in the past; In October 1994, PaineWebber sued Donaldson Lufkin & Jenrette Securities Inc., and Dean Witter Reynolds (before it merged with Morgan Stanley), in separate suits, accusing them of raiding brokers after its purchase of Kidder.

In 1995, PaineWebber dropped the suits — but many on Wall Street viewed the moves as a success. Rivals’ poaching of brokers from PaineWebber sales force slowed considerably after the litigation. PaineWebber hired roughly 90% of Kidder brokers in completing the $670 million transaction in December 1994.

Copyright (c) 2000 Dow Jones & Company, Inc.