This week, Smith Barney will become the first firm to make a change to its payout grid as a result of the securities industry’s recent battle over broker overtime pay and so-called chargebacks (when the firm charges the reps for things like trading errors and sales assistant salaries). Smith Barney is one of many Wall Street firms to have settled lawsuits over pay practices, paying $98 million on a nationwide basis in May.

Smith Barney will now foot the bill for trading errors, assistant salaries and other nuisance fees charged to reps, according to reps and recruiters, but it is cutting payouts to compensate. Starting Jan 1, 2007, they say, reps will receive a 20 percent payout on the first $5,000 of monthly gross revenue. Beyond that, all revenues generated will be subject to the regular payouts. In addition, reps producing $1 million and up will take a 1 percent cut to overall payout, say Smith Barney reps as well as recruiter Rick Peterson, president of Houston-based Rick Peterson & Associates. Lower-end reps will see smaller incremental cuts to payout.

Smith Barney has confirmed that a new pay package will be released this week, but has not confirmed details. “This is a legally complex industry issue—not exclusive to Smith Barney,” says a Smith Barney spokesman. “While nothing is final here, any changes we may consider will have offsets designed to protect our employees against loss and will keep us positioned as an employer of choice for the best advisors in our industry."

In an interview with Smith Barney head Charlie Johnston, Registered Rep. learned that the new package will also include a base salary, which will then be deducted from gross pay, leaving net pay unchanged. (Under Department of Labor rules, those who receive a certain amount of salary every week or month are not eligible for overtime pay.)

Some rival publications have suggested that the end result of the new pay package will be a cut in broker pay, but will brokers actually take home less in the end? Smith Barney says no. And Smith Barney reps that spoke to Registered Rep. say they believe the firm will manage to re-route the money back into reps’ pockets. Not only by paying for things like sales assistants and other little details, but because they have heard the firm plans to set up expense accounts.

In the end, some reps might actually get a boost in net pay. In fact, one broker said he thought some 7 percent of the reps in his office would get a bump in their annual paycheck. Because the average Smith Barney rep’s payout hovers around 40 percent, this means that the average annual pay cut per rep is $12,000. But because the firm will foot the bill for many of the things reps were paying for out of pocket, it could more than even out.

Here’s how: Let’s say a million-dollar producer has a 40 percent payout—then he netted $400,000 in 2006. He probably would have paid out at least $30,000 to his sales assistant, says one recruiter, leaving his actual take-home pay no higher than $370,000. In 2007, when you take into account the 20 percent pay on the first $5,000 and the 1 percent hit to overall payout for top producers, that same rep might net about $378,600, putting him ahead. Meanwhile, the firm also plans to develop expense accounts for its advisors—something that didn’t exist before, recruiters say.

Other major firms have settled overtime and chargeback claims over the past year. In March, Morgan Stanley settled with about 5,000 brokers in California for $42.5 million. UBS paid brokers nationwide $89 million to settle overtime claims. And Merrill Lynch agreed to settle nationally less than two weeks ago for an undisclosed amount.