Wirehouses traditionally change their compensation practices slowly, but the last year has seen huge adjustments, as three firms instituted policy shifts they had been moving toward for years.

The most dramatic and surprising change occurred at Wachovia Securities, which has been going through a major reorganization effort since its merger with Prudential Securities in 2003. The company not only put all its 6,100 brokers on a single grid, but streamlined the grid in a way that made it unique among national full-service brokerage firms.

Where there had been 11 steps on the old Wachovia grid and 19 on Prudential's, the new grid has just two breakpoints, making evaluation of a broker's pay much easier. Now, reps earn 20% for the first $9,000 in sales they generate each month, and 50% for any production above that.

"Simplicity was the No. 1 thing I wanted," says James Donley, president of Wachovia Securities' private client group. "Financial advisers are longing for a compensation plan they can understand. Every businessperson in every other industry knows, within realm, the compensation. That's not the case on Wall Street."

The grid means Wachovia brokers will receive 50% payouts for production above $108,000 a year. Last year, payouts maxed out at 49% for legacy Wachovia reps who grossed more than $900,000 and sold packaged products such as mutual funds or insurance. Prudential reps earned up to 49% if they generated above $1.6 million from fee-based business; transactional sales paid at 5 percentage points less.

Nothing at a wirehouse is ever simple, of course, and the Wachovia grid still contains incentives for reps to nudge their clients toward fee-based accounts. The company did this in part by instituting a deferred-compensation bonus that pays one to two points more to brokers who generate a majority of their business outside of commission accounts.

If a Wachovia broker derives, say, half his annual revenue from fee-based business, he receives a deferred-comp award of 1% of his production in an account that vests over five years. If he derives three-quarters of his revenue from fee-based business, he gets a 2% award. A million-dollar producer who

is completely recurring-revenue-based, for example, would build an extra $20,000 a year in an account to be paid in five years.

And within commission accounts, Wachovia is still assessing a $15 ticket charge that doesn't apply to fee accounts. That, too, has the impact of discouraging advisers from doing commission-based trades.

"If you're doing a thousand equity tickets, it's going to take $15,000 out of your pocket," says executive recruiter Danny Sarch. "There's no way to say otherwise." In other words, Sarch says, Wachovia clearly wants to discourage smaller tickets with this policy.

Another part of the deferred compensation award is open to all brokers regardless of whether they use a transactional or fee-based style. Wachovia already had base bonuses in place that ranged from 1% to 5% of brokers' annual production. This year, it spread the wealth with reps lower on the scale. For the first time, Wachovia opened up deferred comp to reps who gross $250,000 to $350,000. Their base bonus is 1% of annual production. Another group--reps between $350,000 and $500,000--now receives 1.5% rather than 1% of production.

Wachovia, like others on Wall Street, is willing to pay more for fee-based accounts because they generate more predictable revenue. In 1995, the Securities and Exchange Commission's Tully Commission recommended that more brokers use fee-based accounts, but in the past two years, the National Association of Securities Dealers and the New York Stock Exchange have prodded firms to make sure enough trading goes on in these accounts to make it worth the fees. Otherwise, the regulators said, clients would do better to pay only for trading. Donley claims that Wachovia understands regulators' concerns and that his compliance staff closely monitors such accounts.

Donley also says it was important to him and the compensation design team that the new scheme not substantially change most brokers' compensation. "If someone made $100,000 on the old plan, we wanted to try to keep them as close to that on the new one," he says.

This year, Merrill Lynch and Morgan Stanley sent a similar message to brokers about the kinds of clients they should go after: big ones. The firms stopped paying brokers for clients served at the $50,000 and $35,000 levels, respectively.

Since 2002, Merrill has defined clients with less than $100,000 in assets and liabilities at the firm as "small households." As of January, Merrill created another tier within that group and quit compensating reps for business with those clients with less than $50,000 (although for the rest of 2005, they get paid regular grid rates for new small customers). For customers between $50,000 and $100,000, brokers get paid 25% on transactions of $500 or more, and 35% for fee-based and money fund business. If a rep pushed a client to the call center last year, he'll get 50% of the fees generated from that client's fee-based business but nothing from their individual transactions.