Wealth Finance

WITH HIGH WALL STREET PAY GETTING SLAMMED in Washington and in much of the investment community, some firms are showing restraint. But not Lazard, the famed financial advisor and asset manager.

Goldman Sachs (GS) paid 36% of its revenue to employees last year, considerably below the 50% that had long been the industry standard. Lazard also has been feeling pressure to be more disciplined, especially after pouring 86% of its revenue into compensation and benefits in a money-losing 2009. Its shares (LAZ), recently in the mid-30s, fetch 16 times projected 2010 profit of $2.25 a share, a discount to the stocks of rival financial advisory specialists Evercore Partners (EVR) and Greenhill (GHL), mostly because investors doubt Lazard is serious about trimming compensation.

Since going public in 2005, Lazard has had a stated compensation target of 57.5% of revenue. But Ken Jacobs, who took the reins after CEO Bruce Wasserstein died in October, is reluctant to commit to hitting that target this year. Instead, Street analysts forecast, 2010 pay at Lazard will equal about 60% of revenue.

FRUSTRATED LAZARD BULLS ARGUE the stock could rise smartly if the company moves toward a compensation rate of 50% or lower. While employees would take home less pay under such an arrangement, they probably would benefit from higher profits and a stronger stock price. Lazard employees own about 38% of the firm, which has about 136 million outstanding shares.

At a 50% level, 2010 profit could hit $3.34 a share. At 46% — the compensation rate consistently maintained by Greenhill — Lazard would earn about $3.80. Assign the current price/earnings ratio of 16 to $3.34 in profits, and the stock would top 50. Employees would be about $700 million richer, based on their current stake.

Lazard’s compensation ratio seems particularly high, since it gets a sizable chunk of its sales from an investment-management subsidiary. Asset managers typically pay out about 35% of revenue in compensation, rather than the 50% common on Wall Street. The asset-management unit is expected to produce about 40% of Lazard’s projected $2 billion in 2010 revenue.

Greenhill, whose shares are around 83, trades for a lofty 28 times projected 2010 profits because it has productive investment bankers and a disciplined pay policy. Lazard shares have lagged those of Evercore and Greenhill in recent years.

In a fourth-quarter earnings press release in February, Jacobs, 51, said the firm’s “goal is to grow annual compensation expense at a slower rate than revenues and to achieve over the cycle compensation levels on average consistent with the targets we established when we went public in 2005.” In other words, he seemed to be saying, we plan to get to the 57.5% target, but probably not right now. Jacobs declined to speak with Barron’s.

Wall Street isn’t thrilled by this. Goldman Sachs analyst Dan Harris last month removed Lazard from the firm’s “Conviction List,” citing concern about compensation and a big overhang of stock from Wasserstein’s estate and from Lazard managing directors whose shares are vesting this year.

Douglas Sipkin, a Ticonderoga Securities analyst, recently began covering Lazard with a Buy rating and a $46 price target. “We believe all the revenue elements are there, with improvements in M&A, stable restructuring revenues and breakout asset management results. The missing link is compensation discipline,” he wrote.

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