Higher Pay Ratio Drags Lazard to a Loss

Higher Pay Ratio Drags Lazard to a Loss

Lazard Ltd. reported an unexpected fourth-quarter loss Wednesday, hurt by charges triggered by the death of its former chief executive and a major overhaul of its compensation program.

The independent investment bank, which is considered one of the biggest corporate advisers on Wall Street, delivered a $142.4 million loss for a quarter in which most analysts expected a profit.

It included $147 million in charges linked to higher compensation and a payout resulting from the death of Bruce Wasserstein, the former CEO and famed deal-maker who died in October.

Compensation costs almost tripled to $615.5 million from a year earlier as Lazard increased cash and equity payouts to employees.

The company plans to abolish its deferred-cash compensation plan, which pays workers over a number of years, a move that could help attract top talent from bigger Wall Street firms saddled by tougher pay restrictions.

"This is playing offense, not defense," said Kenneth M. Jacobs , Lazard's new CEO. "Its a real advantage today to have a [compensation] mix that is more reasonable to attract people."

Bigger rivals such as Goldman Sachs Group Inc. and Morgan Stanley have put more emphasis on deferred compensation and clawback programs as a result of a furor over excessive pay.

Mr. Jacobs said the new pay plan is justified because Lazard, which largely avoided mortgage-backed securities and other complex instruments that felled bigger rivals, doesn't take on risk the way major Wall Street banks do.

Lazard posted a net loss of $142.4 million, or $1.64 a share, from a year-earlier profit of $38 million, or 50 cents a share. Excluding special charges, the loss was 46 cents.

Net revenue increased 32% to $494.8 million.

Stripping out one-time compensation costs, Lazard reported a profit of 46 cents per share. Analysts polled by Thomson Reuters expected earnings of 50 cents on $455 million in revenue.

Michael J. Castellano, Lazard's longtime chief financial officer, said the company accelerated the amortization of stock units previously granted to Mr. Wasserstein. It also sped up the vesting of deferred cash-incentive compensation awarded in 2008.

The changes in its pay structure will eliminate deferred cash payments and align compensation expenses with annual revenue, he said.

For all of 2009, the company spent 71.8% of its operating revenue on compensation and benefits, excluding charges, up from 55.6% in 2008.

In the past year, Lazard has benefited from robust activity in the division that provides advice for restructuring and bankruptcy, services that were in demand in the recession and aftermath of the financial crisis.

Financial-advisory revenue rose 24%, as restructuring revenue hit a record high, more than doubling from the a year earlier.

Mergers-and-acquisitions revenue increased 24% to $170 million, and Mr. Castellano said he believes that the increase is an "encouraging sign" of a pickup of activity.

"The year is starting off OK on the announced side," Mr. Castellano said in an interview. "There are still a lot of discussions, and we're seeing a pickup of activity. I'd still put this consistent with the trend we're talking about of a gradual build of the business."

Asset-management revenue increased 63%, while assets under management climbed 42% to $129.5 billion.

Midday in New York, Lazard's stock was down 3.9% at $39.42 a share.

—Joan E. Solsman contributed to this article.
9:48 AM

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