Morgan Stanley deferring more broker compensation in 2015

Grid levels remain unchanged, but a greater portion of payout will be tied to vesting requirements, company stock

Nov 13, 2014 @ 10:42 am

By Mason Braswell

Morgan Stanley & Co. is set to make changes in 2015 that will result in brokers having more of their compensation deferred, according to a source familiar with the matter.

Morgan Stanley Wealth Management plans to consolidate the grid-based payout with two bonuses, and then tie a greater portion of that total to company stock and vesting requirements, said the source, who asked not to be identified. Previously, the bonuses were the only portion of compensation that was deferred and were paid separately from the grid payout.

As a result of the changes, most brokers will likely see a rise of a couple of percentage points in how much of their pay is deferred. The impact will vary depending on how much the broker is bringing in and the length of service.

Branch and complex managers were briefed on the plan this week at a meeting in Greenwich, Conn. It has not yet been formally rolled out to Morgan Stanley's 16,000-plus advisers.

As an example, take a $1.1 million producer — slightly above average — who has been with the firm for 10 years. Previously, that broker would have received 48% total payout at a grid rate of 44%, a revenue bonus of 1.5% and a length-of-service award of 2.5%.

The total deferred under this year's plan is 4% from the bonuses, or about $44,000, which is about 8.3% of the total payout of $528,000. That deferred compensation is paid out as 75% cash, which vests over eight years, and 25% equity, which converts to company stock in four years.

In 2015, the percentages will be calculated in the same manner. Instead of a separate breakout for the bonuses, however, the broker will be presented with the total combined payout of 48%, and then a set portion of that will be deferred. For the same $1.1 million producer, it will be deferred at a rate of 10% of the total income, which translates to $52,800.

The deferral rate will vary depending on production. It will start at 1.5% for those generating less than $220,000 and top out at 15.5% for a $5 million producer.

How much more the broker sees deferred will vary, according to compensation expert Andy Tasnady, who had not seen the plan and based his analysis on a reporter's explanation. Lower producers and those new to Morgan Stanley could be hit the hardest because they may not have much of their pay currently tied to the deferred bonus pay.

“It's going to vary a lot [in that example],” said Mr. Tasnady, of Tasnady Associates. “But there's clearly going to be some segments, particularly newer people, who are going to get a lot more deferred.”

The length of service bonus begins at five years, and the revenue bonus starts at $825,000. A very small number of the largest producers who have the most already tied to deferred compensation could actually see a decrease in deferral amounts.

Mr. Tasnady said the deferral rate was “reasonable” compared to what he had seen at competitor firms.

Firms have been moving toward more deferred compensation because it helps keep brokers in their seats and gives the firms an opportunity to claw back some of the money if they jump ship, he said.

It also can help lower compensation expenses in the short term because the payout is structured over eight years rather than hitting the balance sheet as a lump sum.

“They like it because they get a favorable accounting treatment because it gives them an immediate [profit] bump,” he said, based on the assumptions in the example that it would take eight years for the payout to fully vest. “They also like having more stickiness to the relationship because there's more unvested compensation at risk.”

Some brokers, however, can be less sanguine about the trend, he said.

“Brokers like cash,” Mr. Tasnady said. “There's a large core set of brokers who either need the cash now because they're spending all of it, or prefer to have the cash because if they're going to leave in three years they don't like having a big unvested balance they have to leave behind.”

Morgan Stanley's executives have been focused on reducing broker compensation as a share of overall revenue. They have said, however, that they plan to achieve that reduction by encouraging brokers to sell more loans and banking products that are considered “non-compensable” and not paid out on the grid.

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