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By Justin Baer and Francesco Guerrera in New York - FINANCIAL TIMES - January 20 2011
Morgan Stanley has sought to pre-empt new rules capping cash pay-outs on Wall Street, deferring 60 per cent of employees’ 2010 bonuses.
The announcement came as the bank reported a higher-than-expected 88 per cent jump in fourth-quarter profits in spite of a fall in fixed income trading revenues.
Proponents of deferred pay argue the practice can help dissuade bankers and traders from taking excessive risks by chasing short-term profits.
While Morgan Stanley’s 2010 pay-outs may defer more than employees have come to expect – or would like – the move reflects the new realities of Wall Street after the financial crisis.
"It is the way things are going to be," said Jeanne Branthover, who heads the financial services practice at Boyden Global Executive Search. "What we are really seeing in this year’s bonuses is the change that took place because of the crisis. Every firm wants to keep their cash as long as they can."
Details on bonus deferrals have been a closely-guarded secret and have varied widely from bank to bank – one of the reasons some regulators are pushing for more specific rules.
European officials agreed 40-60 per cent of bank executives’ pay should be deferred over three to five years, and their US counterparts are now weighing the adoption of a similar ratio.
The Federal Reserve, the Securities & Exchange Commission, the Federal Deposit Insurance Corporation and other US agencies are close to finalising their own rules. Last year’s Dodd-Frank financial reform legislation gave US regulators until April to set new rules.
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Morgan Stanley paid out $16bn in salaries, bonuses and benefits in 2010, or about 51 per cent of revenue. These costs totalled $14.4bn, or 62 per cent of revenue, a year earlier.
The bank’s announcement was the first time it had revealed what portion of its total bonus pool will be deferred. Previously, only top executives’ deferrals were disclosed. People close to the situation said Morgan Stanley’s staff will hear about the size and composition of their bonuses on Thursday.
Morgan Stanley did not disclose the precise form 2010’s deferred pay-outs would take. In 2009, the bank gave out restricted options that vest after three years and cash that is held by Morgan Stanley for a similar period and is subject to "clawbacks" if the employee underperforms.
Large financial institutions typically defer 20-60 per cent of year-end bonuses, depending on the size of the pay-out.
Morgan Stanley’s plan to defer 60 per cent, “seems high, but it could be the norm,” Ms Branthover said. “We’ll see.”