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UPDATE 1-Lazard sets $125 mln cost-cutting program; profit falls

* Cost cuts to come primarily through staff reductions

* Fourth quarter may include pay cuts-CEO

* Lazard will meet 25 percent margin target by 2014-CEO

* Posts earnings of 26 cents per share, beating Wall Street view

* Board loses Parr and Jordan, adds independent director

Oct 25 (Reuters) - Lazard Ltd plans to cut $125 million in costs each year, mainly through staff reductions, the investment bank said on Thursday, as it works to meet an aggressive profit goal in a weak market for its financial advisory services.

Lazard announced the cost-cutting target - which represents 7.8 percent of its operating expenses last year - as it reported a sharp decline in third-quarter earnings. Its shares rose more than 4 percent.

Higher costs, mainly from increased compensation, and lower revenue from advising companies on mergers and acquisitions have squeezed Lazard's bottom line.

Pay is typically the biggest expense for Wall Street firms, but Lazard gives more of its revenue to employees than its bigger rivals, and it is one of the last firms to announce cost-cutting goals.

Investment banks had been hoping for the past few years that the advisory business would pick up steam, saying record cash levels on corporate balance sheets and attractive pricing should contribute to more M&A activity. However, another key component has been lacking: CEO confidence.

Corporate leaders have not wanted to pull the trigger on deals because of uncertainty about the global economy and other issues, like the possibility of big tax increases in the United States or the European debt crisis. Lazard Chief Executive Officer Ken Jacobs said that has not yet changed.

``It's tough and it's been an uneven environment,'' he said in an interview. ``But it looks like there are a lot of factors in place that, if you can improve confidence, it should be more active.''

PROFIT TARGET

In April, Lazard set out a 25 percent target for operating profit as a percentage of revenue by 2014. Next year, it aims to achieve a margin of 21 percent or 22 percent.

But the lack of deal activity has hampered Lazard's ability to get there quickly: Its third-quarter margin was 15.8 percent.

Even if revenue does not improve, Lazard plans to meet its target through cost-cutting, Jacobs said. About two-thirds of the $125 million in expense reductions will come from compensation, primarily through staff cuts, although he did not rule out the possibility of a lower bonus pool at the end of the year, too.

Lazard is aiming to lower compensation as a percentage of revenue to the ``mid-to-high'' 50 percent range from a current level of 63 percent.

That compares with compensation ratios of 44 percent at Goldman Sachs Group Inc, 45 percent at Morgan Stanley's investment banking business and a 32 percent at JPMorgan Chase & Co's investment bank. Evercore Partners, a smaller boutique firm, paid 66 percent of revenue to employees last quarter.

Lazard is also wielding the ax on noncompensation expenses, including technology, professional services, real estate and travel, Chief Operating Officer Alex Stern said.

The cost-cutting program will result in $110 million to $130 million in expenses, mainly from severance pay. Most of the expenses will come in the fourth quarter.

EARNINGS BEAT

Lazard reported third-quarter earnings of $33 million, or 26 cents per share, down 47 percent from $63 million, or 49 cents per share, a year earlier.

Analysts on average were expecting 21 cents per share, according to Thomson Reuters I/B/E/S.

Lazard said it had met another target of returning $200 million in surplus cash to shareholders one year ahead of schedule. So far this year, it has put $432 million toward buybacks and dividends.

On Wednesday, the board authorized $200 million worth of additional share repurchases by Dec. 31, 2014, Lazard said.

Shares of Lazard were up 4.5 percent at $29.55 in early trading.

The company also detailed board changes in a securities filing.

Vernon Jordan and Gary Parr, who also work in the financial advisory business, have resigned as directors, and Andrew Alper, a private investor and former Goldman Sachs banker, has joined the board.

Jacobs said the changes were meant to fill Lazard's board with more independent voices, an effort that began earlier this year when the investment bank named former Citigroup Inc Chairman Richard Parsons as a director.