Is Morgan Stanley mortgaging its future through compensation
For years, the bank and its rivals have paid employees with a mix of stock and cash. The stock is typically deferred over several years, a move aimed at aligning employees’ interests with the firm’s and keeping people in their seats. Deferred stock is accounted for in the year that the employee gets it, so stock grants given for 2012 that don’t vest for three years will be accounted for by firms in 2015.
Cash, though, is paid - and accounted for - upfront.
But in recent years, Morgan Stanley has been deferring its cash bonuses for top earnings for up to three years. Not surprisingly, the amount of deferred compensation â€" cash and stock â€" has risen sharply at Morgan Stanley, according to regulatory filings. In 2009, the firm deferred 40 percent of its total compensatio.. That percentage climbed to 60 percent in 2010 and 75 percent in 2011.
Morgan Stanley says the move is good corporate governance, tying their employees’ interests to the firm’s and giving them a bigger pool to claw back if something goes wrong.
Yet, critics say it also pushes the tab for current compensation into the future, when Morgan Stanley will have to pay for the compensation of past years.
“The amount the firm is deferring has been growing and eventually that tab will come due,†said a rival Wall Street executive who asked not to be named.
The firm, however, insists that the way it pays people won’t be an issue in coming years.
A year ago, Morgan Stanley’s chief executive, James P. Gorman, told analysts that 2011 was “a high-water mark†for accounting for deferred compensation. “We are acutely aware of the impact of deferral decision on future periods, but with the last years behind us, we will have more flexibility in the years to come,†h! e said.
The firm’s decision to lay people off will work in its favor, at least when it comes to compensation. At the end of 2012, Morgan Stanley had 57,061 employees to pay, and just announced it was letting go of 1,600 employees. This time last year, 61,546 people worked for the firm. This leaves the firm with fewer people to pay, alleviating the pressure on the compensation pool.
As well, by pushing more compensation into the future, it is likely that more shares and cash will be left on the table from employees who leave voluntarily, or are terminated for cause. Morgan Stanley is also paying less money to those who remain, which should reduce future compensation payouts.
And this year, the firm changed the formula for compensation that will be deferred, a move it says resulted in fewer people seeing their compensation pushed into the future. More than 82 percent of eligible employees got their cash bonuses upfront. Cash bonuses were deferred for the remaining 18 percent of emploees, the top earnings.
It’s not known what percent of the total bonus this group accounts for, but the total amount of deferred compensation in 2012 went down, Ruth Porat, the firm’s chief financial officer, said in a recent interview.
Of course, Morgan Stanley is also hoping to increase its revenue, which would give it more money to pay people with. In 2012, Morgan Stanley reported revenue, adjusted for an accounting charge, of $30.51 billion, up from $28.55 billion the year before.
