The incentives reflect the hard times the brokerage industry has fallen on as the market flounders and the recession continues. Increasing rewards for individual performance effectively "makes branch staffers more hungry," says Matthew McGinness, analyst at Cerulli Associates, a Boston financial-services consultancy. A Schwab spokesman says the company instituted the changes partly because highly productive individuals working in underperforming branches weren't being rewarded during the slump.
LESS SHARING. Schwab's culture has traditionally shunned the individual goal approach. Top execs saw it as encouraging staffers to put their financial interests above what might be best for the customer, according to former branch staffers. Under the new plan, salaried staffers can earn bonuses based on whether they achieve specific goals in areas such as gathering client assets and generating revenue from selling financial-advice packages. Each staffer determines his or her goals.
Under the old system, individuals within a branch merely divided up a pool of bonus money that the branch received to reflect how well the office as a whole met its financial goals. The new system still includes a branch pool, but it accounts for less of staffers' bonuses.
The plan also puts Schwab's compensation system more in line with that of traditional full-service brokerages, such as Merrill Lynch or Salomon Smith Barney, where pay has long been tightly pegged to quantifiable individual performance. But those brokerages have generally charged higher fees for their services as well, emphasizing that clients get individual attention they couldn't get at a discount broker.
STOCK DISINCENTIVE. Schwab says it doesn't have any plans to raise its fees. In recent months, the brokerage had been working to revamp its compensation system. Its pay traditionally ranks "in the 40th to 50th percentile" in the industry, according to CFO Christopher Dodds. Moreover, compensation also includes Schwab stock, which, hovering at about $14 a share, down from $26 a year ago, isn't as much of an incentive nowadays.
Schwab has been struggling as trading volumes dried up last year. In 2001, the San Francisco company had its first-ever layoffs. It posted net income of $199 million in 2001, down 72% from the prior year, on operating revenue of $4.32 billion, a 25% decline.
A Schwab spokesperson says increasing the emphasis on individual performance reflects a change in overall customer-service strategy. As Schwab increasingly works to move away from merely executing transactions, he notes: "We're putting more focus on the relationship with the client. A relationship is with an individual person and how that person interacts with the client, and we feel we need to encourage individuals to develop." A fatter bonus check may be the best encouragement. By Louise Lee in San Mateo