As compensation on Wall Street continues to be hotly debated, Morgan Stanley has issued revised guidelines for paying its people.
Starting this year, executive compensation for Morgan Stanley employees will comprise three elements: a base salary which is fixed, an annual bonus and a long-term performance-based compensation. The investment bank did not outline how incentive compensation will be divided between the latter two components.
Morgan Stanley says its new "multi-year" performance plan ties stock awards to the company's performance over a three-year period. This is presumably intended to reduce the incentive for employees to focus on the creation of short-term shareholder value. Performance will be measured by metrics which include both financial ratios and performance relative to the firm's peer group.
Base salaries will reflect skill, experience, knowledge and responsibility levels, and will be in the median range paid by competitor firms, Morgan Stanley says in a note. Bonuses, which can be paid as cash or stock options, will be based on company and individual performance over a one-year period, and will be linked to both absolute and relative performance metrics. Long-term performance-based compensation will be paid in stock units based on the firm's performance over a multi-year period and tied to both absolute and relative performance metrics.
Stock units earned by senior executives will be based on the achievement of performance goals over a three-year period and will convert to shares after three years only if the firm satisfies predetermined performance goals over that period. This means the award is at risk for three years. One-third of the award will be earned based on the firm's average return on equity (ROE), one-third on the average ROE relative to its peers, and one-third based on the total shareholder return relative to its peers.
If performance falls short of the targets the entire award will be forfeited.
"The changes the company has made to its compensation programme were designed with these important goals [attracting, motivating and retaining talent] -- and shareholders' interests -- in mind," the US investment bank says.
Morgan Stanley chairman and chief executive officer John Mack received no cash bonus in either 2007 or 2008. Mack has foregone a cash bonus, taking stock instead, with the intent of aligning his interests with those of shareholders. Two Morgan Stanley co-presidents, Walid Chammah and James Gorman, are also not receiving a bonus for 2008. Year-end compensation for the firm's 14-member operating committee is down by an average of 75% compared to 2007, while compensation for the 35 members of the management committee is down by an average of 65% from 2007.
Morgan Stanley's entire bonus pool for 2008 is down 50% from 2007.
The investment bank also stressed that it is the first major US bank to enact a clawback provision in excess of requirements of the Troubled Asset Relief Program (Tarp). The clawback allows Morgan Stanley to claim back compensation paid, if the employee engages in conduct detrimental to the firm, causing for example the restatement of results, a significant financial loss, or reputational harm. Clawbacks are applicable to a broad group of employees and will be in place for three years after the compensation is paid.
In the future, 75 senior executives will be required to hold at least 75% of the compensation that is paid to them in common stock and equity awards for three years, presumably to ensure they think long-term and, as with Mack, their economic interests are closely tied to the firm.
Morgan Stanley highlights that it is guaranteeing neither bonuses nor severance to senior executives.
In the note, the bank articulates the six objectives underlying the design of its compensation structure: driving company and individual performance; balancing short-term and long-term performance demands; retaining key talent and protecting the company's interests; avoiding unnecessary or excessive risk taking; aligning executive and shareholder interests; and competing effectively for key talent.
"2008 was a year of extraordinary challenge and change for Morgan Stanley and the entire financial services industry -- with tremendous turmoil in the global markets, unprecedented governmental action in the financial sector, and a significantly altered competitive landscape," Morgan Stanley goes on to say in the report, perhaps stating the obvious to emphasise that it is changing compensation practices in line with industry changes.
Morgan Stanley says the firm decides total annual compensation levels after evaluating both company and individual performance, which includes performance against targets; a comparison to peer group compensation data; and input and recommendations from senior executives among other factors. Morgan Stanley's compensation committee comprises three directors who are all independent board members and responsible for annually reviewing and approving compensation, including equity grants, paid to the firm's executive officers.
Morgan Stanley's memo highlights that "pay-for-performance" characterises its compensation policies and programmes annually as well as in 2008.
The investment bank says it is committed to moving away from compensation practices that concentrate heavily on annual incentive awards and towards a programme that is balanced between fixed, short-term and long-term compensation.