It's beginning to look a lot like Christmas on Wall Street, and as banking companies increasingly find themselves seeking to attract and retain investment talent, some are turning to tools more commonly used by Wall Street rivals.
Beyond distributing bonuses - which on Wall Street are expected to beat last year's levels by at least 20% to 30% - some are offering key staff members the opportunity to co-invest in high-return private equity funds established by the bank. CIBC World Markets, the U.S. investment banking arm of the Canadian bank, is the latest institution to offer merchant banking opportunities. It is in the final stages of a plan to set up a Wall Street Street-style co-investment program, according to a CIBC source.
It follows major investment banks and commercial banks like Chase Manhattan Corp. and Bank of America Corp. that have private equity functions and are trying to attract the same highly paid investment bankers as Wall Street.
There is no cookie-cutter standard for such benefit plans, which are an additional form of compensation on top of a base salary and annual bonuses that investment bankers are paid.
Donaldson, Lufkin & Jenrette Inc., one of the first major firms to set up such a compensation plan, offers an annual investment opportunity in its merchant banking and private equity funds to any employee considered a "professional," including first-year associates. Started as an alternative to offering employees stock and options when it was wholly-owned by the insurer Equitable Cos., Donaldson Lufkin also provides leveraging on an individual's investment on a 4-to-1 basis.
Chase, on the other hand, every year selects 250 employees in its global banking division who are considered high performers or potentially high performers for its three-year-old program and offers 3-to-1 leveraging on the investment.
And foreign banks with investment banking businesses have been increasingly joining the fray. In September, Credit Suisse First Boston started offering co-investing opportunities to employees at the director level and above in its $2.7 billion private equity fund.
While not new for the commercial and investment banks that have sizable venture capital and merchant banking entities, these plans are changing to include more members of the firm besides just senior executives or those that are directly involved in making private equity investments, compensation consultants say.
"There is a tremendous competition for talent among the big firms right now," said Steven Hall, a managing director at Pearl Meyer & Partners Inc. "One way to do that is to have a spectacular compensation plan."
The private equity carrot is a particularly sweet one for executives, even for those who may already be earning multimillion-dollar bonuses. During the second quarter, the latest for which data is available, one-year venture capital investments averaged returns of 85.4%, and the overall private equity industry produced returns of 10.8%, according to data analysis firm Venture Economics Information Services.
Co-investment plans have an additional attraction as firms try to find more creative ways of making sure their employees, whom they often have spent much money and time recruiting, don't hop to a rival firm.
For instance, some firms are considering taking away an employee's rights to their investments if they give less than four months' notice, Mr. Hall said.
And commercial banks that have been developing business lines in such traditionally Wall Street business lines as mergers and acquisitions or high-yield are far from immune to retention problems. In fact, their entry into investment banking helped spur higher bonuses and richer compensation plans.
"Wall Street deals have been so strong that players other than the bulge brackets have come into these businesses," said T. Lee Pomeroy, a partner at Egon Zehnder International. "The result is a need to have higher compensation" for investment bankers, he said.