Some of Wall Street's Masters of the Universe, buffeted by the stock market's declines, have lost a lucrative pay perk.
Credit Suisse First Boston capped a strategic push to cut expenses by, in recent days, tearing up the guaranteed-pay contracts and other deals of around 350 top investments bankers and traders, which the big securities firm hopes could save a total of about $400 million over the next three years. These contracts, which became popular in the 1990s bull market, guaranteed the pay of traders and bankers even if business dropped many of the guarantees were valued at more than $1 million a year.
Among those at CSFB whose contracts were renegotiated: Frank Quattrone, a highflying investment banker who in the late 1990s received annual pay packages approaching $100 million, according to people familiar with the firm. As part of a new deal, Mr. Quattrone, who heads the technology investment-banking group for the big securities unit of Zurich's Credit Suisse Group, gave up a guarantee that he and his team would receive a chunk of the group's annual profits, according to people with knowledge of the plan.
Beginning next year, Mr. Quattrone's pay will be set by the firm's top management, including CSFB Chief Executive Officer John Mack, along with investment-banking chiefs Charles Ward and Tony James. Even with the changes, some of the executives affected still will receive annual paychecks of $1 million or more. The new pay package will be based on the firm's overall profits, these people say, rather than just the Quattrone team's own investment-banking business.
At the same time, CSFB has reached an agreement in principle to redraw the guaranteed contract of Jack DiMaio, chief of the firm's North American bond business, which was valued at more than $45 million over three years, according to a person familiar with the matter. This negotiation was part of broader pay contracts being arranged for Mr. DiMaio's entire team of around 300 executives, which had been guaranteed a total of more than $300 million over three years. Under the new pact, Mr. DiMaio's team has agreed to give back to the firm a big portion of their guaranteed-pay package this year and next, people close to the firm say. Mr. DiMaio couldn't be reached to comment.
People at CSFB say the guaranteed-pay contracts, which forced key executives to work independently to generate as much profit for themselves and not necessarily the firm, prevented CSFB from developing a common culture. Tearing up such contracts is important to "create a strong one-firm culture, which is essential to leveraging our many strengths, meeting the challenges we face and achieving our full potential," Mr. Mack said in an internal memorandum. A spokeswoman for Mr. Quattrone declined to comment.
The move by CSFB suggests that other major Wall Street firms could face pressure to scale back such perks, which have increasingly been used as a recruiting tool. In recent years, CSFB has been a leader in such practices indeed, CSFB extended a guarantee to Mr. Quattrone to lure him from the securities unit of Deutsche Bank AG in 1998. Historically, however, such guarantees have ended badly for securities firms because the executives get to keep the cash even if the profits end up less bountiful than expected.
"The system has been exploded now that the leader in such deals is out of the business," says Michael Holland of Holland & Co., a Wall Street money-management concern.
The move isn't all bad news for Mr. Quattrone and his group of investment bankers. For CSFB, the action involving Mr. Quattrone signals that the firm believes he won't be charged in a continuing investigation of Wall Street's practices involving the distribution of initial public offerings of stock, people at the firm say.
CSFB has been a focus of probes by the U.S. attorney's office in Manhattan, the Securities and Exchange Commission and the National Association of Securities Dealers into whether securities firms obtained outsize commissions from investors in exchange for hot IPOs. CSFB fired three brokers this summer who worked with technology-group clients, alleging that they violated firm policies in allocating IPOs to hedge funds.
"Frank has endured months of intense media scrutiny," Mr. Mack said in the internal memo. "I know how very difficult that has been for him and his family because there has been no evidence that Frank has done anything wrong or inappropriate. I have complete confidence in his integrity and ethics." As part of the agreement, Mr. Quattrone will also join CSFB's executive board, a group of executives that develops strategy for the firm. Securities regulators and prosecutors declined to comment on the status of the IPO investigations.
In his memo, Mr. Mack also said Mr. Quattrone, along with top aides George Boutros and Bill Brady, will maintain their current roles as top managers of the firm's technology investment-banking group.
Earlier this year, the firm weighed the possibility that Mr. Quattrone would shift his role at CSFB to managing a $1 billion venture-capital fund. But Mr. Mack said in his memo that Mr. Quattrone's technology group, in a difficult business environment, helped generate more than $1 billion in revenue for the firm for the third consecutive year.
The new pay agreements mark a milestone for CSFB under Mr. Mack. Since taking over at the top of the firm in July, Mr. Mack's biggest challenge has been coordinating the firm's broad-based operations and removing the fiefs that have hampered teamwork. CSFB's profits have been pinched in recent months and the firm has lost market share to competitors, and cutting back such guarantees is needed to help get the firm's financial profile back in line with the rest of Wall Street.
Through the first half of 2001, CSFB fell to fifth place in global stock and bond underwriting, down from third place in the year-earlier period. And in the first half of 2001, CSFB's net income fell 59% to $337 million from $761 million a year earlier. In the second quarter, the firm's compensation costs of 58% of net revenue were among the highest on Wall Street, above the industry average of about 50%.
With third-quarter revenue down 20% from the second quarter, CSFB has said it expects a third-quarter operating loss of $120 million other major securities firms reported third-quarter profits.
Mr. Quattrone's pay was based on production. Thus, during the heady days for technology stocks, when CSFB was the premier underwriter of such offerings, he earned huge annual sums that approached $100 million, the people familiar with the firm say. If the technology banking business rebounds strongly, the changes affecting Mr. Quattrone's group could save the firm as much as $200 million over the next three years, people close to the firm say.
However, the Quattrone group is also receiving an upfront payment of more than $150 million in stock as part of the agreement to change the old formula, according to one person familiar with the talks. As a result, this person said, the group could actually do better under the new pay plan if the group's business remains at the current depressed levels.
Mr. DiMaio and 43 of his top traders and salesmen received their guarantees after they threatened to defect to rival Barclays Capital, the investment-banking arm of Barclays Bank, a person familiar with the matter says. In addition to other changes, the team agreed to eliminate the final-year of the three-year deal, and allow management to determine its compensation, these people say. The upshot: Savings of more than $200 million over the next three years, people at CSFB say.
Mr. Mack's "ultimate success will be based on transferring dollars from the compensation line to the bottom line," says Amy Butte, a securities-industry analyst for Bear Stearns Cos.
Investment bankers on Wall Street receive an annual bonus, which accounts for the bulk of their pay, based on the amount of business they generate. This leaves securities firms wide latitude to slash employee pay during slow periods.
But amid the raging bull market of the 1990s, many big Wall Street firms doled out huge contracts -- which guaranteed pay over a number of years -- to keep stars from jumping ship, or to entice others to join their firm. In 1999, for example, the securities unit of UBS AG handed out a three-year package valued at $70 million to lure health-care investment banker Benjamin Lorello away from the Salomon Smith Barney unit of Citigroup.
Still, no firm on Wall Street could match CSFB under its former Chief Executive Allen Wheat, who was succeeded by Mr. Mack in July. In addition to the deal he arranged with Mr. Quattrone, Mr. Wheat agreed to a number of large guaranteed-pay packages to bankers and traders to keep them from jumping ship, particularly after some star bankers began to flee after CSFB bought Donaldson, Lufkin & Jenrette Inc. last year.