Lazard Ltd (LAZ) Could Benefit from a Slimmer Employee Payout - Barron's (GS)

Lazard Ltd (NYSE: LAZ) shares are trading 1.15% higher today, as Barron's reports that they investment firm may need to but the pay it dolls out, or EPS is going to be a struggle in the future.

To begin, Goldman Sachs (NYSE: GS) paid out about 36% of its revs to employees in 2009, below the industry "standard" of 50%. By comparison, Lazard paid out 86% of its revs to employees in 2009...a drastic comparison. But the firm, like Goldman, also feels the pressure to trim-down payouts to employees, and is making moves to meet certain goals.

For example, the firm has a stated compensation target of 57.5%, though the target with new CEO Ken Jacobs could top that mark, and estimates have a payout of about 60% of revs.

Bulls on the stock all agree...the stock see some serious appreciation if the company would just make moves toward a compensation structure of 50% or lower. The employees would take home less pay, but benefit from a gain in the stock price. Should the firm aim for a 50% level, FY10 EPS could be $3.34. 46% would provide an EPS of $3.80. With a current P/E ratio of 16x, the price of the stock could easily top $50, up from $38.56 currently, a near-30% premium.

Additionally, Lazard draws about 40% of its revs from investment management, an area where nost non-Wall Street firms pay out 35% of revenues.

Barron's says that non compensation costs have run at 20% of revs, meaning that public shareholders are entitled to just 20% revs, or about one-third of what employees take. That 20% is also pre-tax and pre-interest expense on about $1.2 billion in debt. Lazard currently has $1 billion in cash on the balance sheet as well.

However, the company is running pretty strong right now. It is in the top 10 in the world as a merger advisor, and the number one financial restructuring advisory group. It is also the largest financial advisor unaffiliated with a major bank or securities firm. Half of its 2009 revs come from outside the U.S. Its asset-management arm brought in $10 billion last year.

The firm still did lose about $1.68 per share last year, due in part to one-time charges. The biggest was an $86.5 million charge related to the late CEO Bruce Wasserstein in a 2008 contract that vested at his death. Another $60.5 million came from other vested or deferred cash awards to employees. The firm generated an EPS of $0.09 minus these items, compared to $1.65 in FY08.

The company maintains that its payout was 72% ex-items for FY09, not 86%. However, Barron's notes that the generous pay packages were in place anyway, and maybe not in the best interest of the shareholders. Barron's states that: "Lazard granted Wasserstein 2.7 million restricted stock units worth $96 million in 2008 as part of a new five-year job contract. He was paid $41 million in 2007. Lazard also paid one of its long-time directors, the 74-year-old Vernon Jordan, more than $3.7 million in 2009, including use of a Manhattan apartment that cost it $288,000, plus another $217,356 for taxes stemming from that perk. Jordan is best known as a confidante of Bill Clinton."

Finally, Barron's notes that the company is being run like a private company...mainly for employees' benefit. However, a more disciplined pay policy would be a benefit for both investors and employees, a change everyone can appreciate.

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