Lazard's bottom line was hit hard by the weak M&A market last quarter. But that hit did not extend to its bankers, thanks to Lazard's bet on a big 2012.
The bank's fourth-quarter revenues from advising clients dropped sharply from the prior year and dragged down the full-year's advisory revenue 11% below 2010's.
For the year, the firm saw a 4% drop in strategic advising revenue, which includes M&A, and is the bulk of the firm's revenue. There was also a steep 33% drop in restructuring revenue even though it claimed the top spot in league tables of U.S. completed and announced restructurings for the year.
But while total revenue for the year fell 4%, the bank's compensation fell just 2.1%, and took up 62% of operating revenues.
That high compensation led the bank to miss its bottom-line expectations and shares slid 7% to $26.86.
Lazard said it significantly reduced discretionary bonuses, but added employees and believes that shareholders will ultimately be rewarded for Lazard's ability to recruit and retain employees.
Smaller investment banks have faced criticism for overpaying talent in order to compete. Monday, David Trone at JMP Securities said Lazard was picking current employees over shareholders, but was trying to set-up future performance.
Citi analyst Keith Horowitz said the compensation ratio was higher than his expectations, and while Lazard would like it to fall to the "high 50s," Horowitz believes that will be hard this year.
But Lazard is predicting big things in 2012, so it thinks it needs its bankers.
"Multinational corporations have limited opportunities for organic growth in the developed world. Yet they have strong balance sheets, record amounts of cash, and financing is available," Chairman and Chief Executive Kenneth Jacobs said in a release. "Emerging market champions are also looking for opportunities in the developed world. As a result, we expect to see more cross-border deals."
This story first appeared on WSJ.com.