Friday, March 07, 2008

CIBC's $100 Million+ Retention Plan for Its Stockbrokers

The Globe and Mail, Andrew Willis & Boyd Erman, 7 March 2008

Canadian Imperial Bank of Commerce rolled out a $100-million-plus retention plan Thursday aimed at preventing defections among 1,300 stockbrokers at the bank, which has been battered by U.S. credit woes.

CIBC will advance up to $300,000 to its financial advisers in the form of a loan that will be forgiven over 10 years, providing the stockbrokers stay with the firm, according to documents distributed internally to staff. CIBC has not publicly released details of the compensation plan, which is scheduled to take effect in June.

Top producers at the bank's brokerage division, CIBC Wood Gundy, who already make more than $1-million a year by generating more than $2-million in commissions, would be eligible for the $300,000 loan. The average financial adviser generates revenues of $867,000 for the bank, takes home $400,000 and would be able to borrow $125,000. At the low end of the scale, a new, green broker who takes home $50,000 could borrow $30,000.

"This plan is part of an ongoing investment in our high-value Wood Gundy brokers and our investment advisers," a spokesman for CIBC said.

This type of retention scheme has been used before at many financial institutions. CIBC unveiled the loans in the wake of a quarter that saw the bank lose $1.46-billion, after extensive writedowns of U.S. subprime mortgages and other credit holdings.

CIBC stockbrokers are partly paid in bank stock, which is down 36 per cent in price over the past year, and that has created unrest in the ranks.

"They are very worried about clients and brokers being so disgusted with CIBC that there could be a mass exodus," said one executive at the bank, who asked for anonymity.

CIBC's new compensation plans is seen as a sound business strategy by analysts. "The forgivable loan is a pretty popular tool in the industry," said Robert Sedran at National Bank Financial. "The broker network is highly valued all over the Street, everyone is trying to add stockbrokers and it's very important to retain your best people."

Rivals have stepped up efforts to hire away CIBC stockbrokers in the wake of the bank's recent troubles, which began in October. Executives at rivals say the new loan plan plays on the psychology of financial advisers, and should limit recruiting by rivals.

"Brokers are like the general public: Guys go out and spend it, and then they're left saying 'Jeez, if I leave the firm I have to pay back this $200,000 or $300,000 loan, so I'm just going to stay where I'm at,'" said the head of wealth management at another dealer. He said the amounts involved are enough to deter poaching, as a rival trying to hire from CIBC would have to shell out a bonus to help repay the loan.

CIBC's chief executive officer, Gerry McCaughey, introduced a lucrative retention plan in 2001 when he brought aboard 1,000 Merrill Lynch stockbrokers. That scheme, which expired this year, is seen as successful, as there were relatively few defections.

The bank now employs 1,300 stockbrokers who oversee $121-billion in client assets. Internal documents show CIBC is targeting $210-billion of assets, with the same-sized adviser force, in five year's time.

What CIBC's stockbrokers receive up front, in the form of forgivable loans, they may lose down the road, suggested executives at several rival dealers. They said the bank, and rivals, may try to offset the cost of retention schemes down the road by reducing commissions or other compensation for brokers.

Stockbrokers are typically paid on what's known as a grid, with the percentage of commissions they take home rising as they bring in more money. One rival executive said: "I bet you dollars to doughnuts that within six to nine months they will cut their grid to pay for this."