Morgan Stanley is giving employees a greater portion of their bonuses up front as the bank seeks to structure pay in line with peers and lower expenses in future years.
The compensation committee of Morgan Stanley's board agreed to defer future bonus pools at an average rate of 50%, down from about 80% last year, the company said in
a regulatory filing Friday. The firm also will take a fourth-quarter charge of as much as $1.2 billion to cover the cost of accelerating vesting of deferred pay awarded in previous years, according to the filing.
The moves mark a reversal from Morgan Stanley's efforts to defer more pay since the 2008 financial crisis to tie bankers to the firm and reduce immediate costs, peaking when it deferred 100% of 2012 bonuses for many senior bankers. The early vesting of previous awards will allow more flexibility in managing future costs, chief executive James Gorman said in a memo to employees obtained by Bloomberg News.
“Now that our business strategy is in place and the firm's performance has stabilized, it is time to bring our deferral policy to an appropriate long-term level, in line with the rest of the industry,” Mr. Gorman wrote.
The compensation committee allowed previous deferred cash bonuses to vest on Dec. 1, while the payment schedule on the awards isn't changing, according to the memo. That means the move is largely an accounting one, giving Morgan Stanley the ability to recognize the costs at once instead of over years.
'ACUTELY AWARE'
The cost of deferred bonuses typically is recognized when the awards vest, meaning each year the bank has compensation expenses before it hands out any pay. The firm said earlier this year that the total cost of deferred awards in 2014 may be as much as $2.57 billion.
Morgan Stanley increased its average deferral rate to 75% in 2011, up from 40 percent two years earlier, amid low profitability. That was the first of three straight years with return on equity of less than 6 percent, and Gorman said at the time he was “acutely aware” of the impact of the decision on future years.
“Our financial performance over that time required us to defer far more bonus compensation than we felt appropriate from a competitive viewpoint,” Mr. Gorman said in the latest memo. “Our outsized deferrals over those years created a burden on future year earnings.”
The bank's ROE has risen to about 8% in the first nine months of this year and Mr. Gorman has set a target of 10 percent for next year.
Morgan Stanley's shares have climbed 19% this year, the most among the five largest Wall Street banks.
The charge will be offset by a previously announced $1.3 billion tax benefit the firm will recognize in the fourth quarter from changing its brokerage subsidiary to a corporation.
The process for determining the total amount of bonuses for 2014 hasn't changed, Mr. Gorman wrote in the memo, the contents of which were confirmed by Wesley McDade, a Morgan Stanley spokesman.
MORE CASH
Morgan Stanley has been giving its bankers more cash upfront over the past year. Its 2013 awards featured lower deferral rates than those of 2012, and earlier this year it decided to raise base salaries for associates and vice presidents in investment banking by about 25% to aid the younger employees with their cash flow.
“If you're not profitable, you've got to be more modest with what you're prepared to do on compensation,” Mr. Gorman said in a Bloomberg Television interview last month. “We've turned, Morgan Stanley is now four or five years of growth and profitability, continuously improving, and we pay competitively for our people in the market.”
