The top advisors of the Morgan Stanley/Smith Barney joint venture will be getting retention bonuses that could total up to $3 billion, according to a company spokesman.

The bonus monies will be paid from revenue generated by the joint venture and not the federal Troubled Asset Relief Program (TARP), said James Wiggins, a Morgan Stanley spokesman.

Industry sources offered mixed reactions to the details of the plan, on one hand calling it generous, while on the other, noting that it might dampen enthusiasm among advisors.

The bonus program comes with a couple of conditions. An advisor must stay with the firm for nine years to get the full amount. If he or she leaves before the loan is amortized, a claw back feature requires the advisor to repay any unforgiven amount.

“We estimate that 6,500 out of 20,000 [advisors] will be eligible for the retention,” said James Wiggins, a spokesman for Morgan Stanley. Branch management, senior executives and support staff are not eligible for the retention bonus program.

The structure of the bonus plan acknowledges the outrage from politicians in Washington, as well as the public, over executive compensation and bonuses to securities industry professionals. “The funds were never coming from TARP, but we’re making that explicitly clear, with the way we are structuring this,” Wiggins said.

Under the program, which was announced Friday, payments are based on production for the 2008 calendar year. Front-end payments are scheduled for January 2010 and back-end payments are slated for January 2012.

The top tier of producers—those who took in $1.75 million and more—will receive 75% of production levels on the front-end payment. They will also get a guaranteed back-end payment of 30% in 2012. They do not have to meet growth hurdles.

Meanwhile, producers who generated between $1.5 million and $1.74 million will receive a front-end payment of 75%, and a back-end payment of 30%. To qualify, they must have increased revenue by at least 25% between the end of 2008 and the end of 2011.

Advisors who generated $1 million to $1.49 million in earnings get a front-end payment of 75% and a back-end amount of 25%. Those with earnings of $750,000 to $999,000 get a front-end payment of 50% and a back-end payment of 25.

Producers with $500,000 to $749,000 will receive a front-end payment of 30% and a back-end payment of 30%. All advisors in this group must clear the same growth hurdle: increase revenue by at least 25% between the end of 2008 and the end of 2011.

Morgan Stanley also took younger and less experienced financial advisors into consideration, requiring this group to clear the growth hurdle, too. Advisors with two to five years of experience and production between $250,000 and  $499,000 will get 10% to 20% at the front-end, based on revenues and 25% at the backend subject to the growth hurdle.

For advisors with six years and $300,000 to $499,000 of production a 10% payment at the front-end awaits, with a 25% at the back end. Advisors with seven years of experience and who meet production of $350,000 to $499,000 will receive 10% upfront and 25% on the back end.

After reviewing the details of the retention plan, William Willis, president and chief executive of Los Angeles-based Willis Consulting, a recruiting firm, called it generous. He said that it is very similar to what Merrill Lynch paid its brokers. Willis believes that Morgan Stanley was wise to pay out the front-end payments for one year, to avoid the specter of paying bonuses out of federal bailout money.

On the other hand, he added, the long wait for the front-end payment might leave the Morgan Stanley/Smith Barney venture vulnerable to walkouts. Smith Barney advisors are already targets for heavy recruiting by other firms, he said.
Michael King, president of Michael King Associates, a New York City-based recruitment firm, pointed to the 25% growth hurdle as problem. “That is a high bar [for advisors to meet], based on the things that are happening in the market,” he said. “In this situation, that could be much more difficult.”

The Morgan Stanley/Smith Barney plan underscores the tension and the competition surrounding bonuses. The news that Morgan is handing out these retention awards to keep top advisors at Morgan and Smith Barney comes on the heels of the announcement that its rival, Wachovia, isn’t.

On Friday, Wachovia, which has been acquired by Wells Fargo, said it would not be giving out retention packages to their advisors.

“The Wachovia guys are not going to be happy,” said one industry professional familiar with that company. “The whole process has been grossly mismanaged. They were led to believe they were getting something for a long time. It is one thing when the answer is no, but when it turns from ‘yes’ to ‘no’, then [that is worse].”