Dec. 8 (Bloomberg) -- Morgan Stanley will tie employees’ compensation more closely to long-term results and said Chief Executive Officer John Mack and Co-Presidents Walid Chammah and James Gorman won’t receive bonuses this year amid the worst financial crisis since the Great Depression.

Merrill Lynch & Co. Chief Executive Officer John Thain and four deputies also opted today to go without 2008 bonuses, according to a person familiar with the decision who declined to be identified because the New York-based securities firm hasn’t disclosed it. Merrill, which has lost about 70 percent of its stock-market value in the past year, is being acquired by Bank of America Corp.

All 14 members of Morgan Stanley’s operating committee will have their compensation reduced an average of 75 percent from last year, while the 35 members of the management committee’s pay will be cut 65 percent on average, Mack, 64, said in an internal memo today. Mack, who gets an $800,000 salary, also gave up his 2007 bonus after the New York-based firm had its first quarterly loss.

Lower revenue and unprecedented U.S. government investment in the financial industry are forcing Wall Street firms to scale back compensation, their largest expense. While Morgan Stanley, which converted to a bank-holding company in September and received $10 billion in U.S. aid, joins rivals in giving up year- end awards for top executives, it is going further with a plan that allows the firm to take back bonuses if an employee’s conduct later proves detrimental to the firm.

‘Humility, Contrition’

“As long as we have the government involved in financial companies there’s a need for these companies to show some humility or contrition and that’s what Morgan Stanley is doing,” said Benjamin Wallace, an analyst at Grimes & Co. in Westborough, Massachusetts, which manages $650 million. The changes are “also definitely good for running the business.”

Year-end bonuses, which typically account for two-thirds of compensation at Wall Street firms, are under scrutiny this year after banks and brokers racked up more than $980 billion of writedowns and credit losses, and the U.S. passed a $700 billion financial-rescue plan for the industry.

“We are expecting to make a number of other changes to year-end compensation, beginning this year, to tie compensation more closely to multiyear performance and each employees’ contribution to the firm’s sustainable profitability,” Mack said in the memo. He said the changes will be subject to compensation committee approval.

‘Clawback Provision’

Starting this year, Morgan Stanley plans to make part of employees’ year-end cash bonuses subject to a “clawback provision” that enables the firm to take back the money “if the individual engages in conduct detrimental to the firm,” the memo said. Examples of “detrimental” conduct could include any need for a restatement of results, a significant financial loss or any reputational harm to the firm or its businesses, the memo said.

“It’s interesting to have that clawback feature,” said Grimes & Co.’s Wallace. “Anything you can do to get people thinking with a long-term perspective is good.”

Morgan Stanley isn’t granting any stock options as part of year-end compensation in 2008, the firm said.

Starting next year, the company will tie a portion of senior executives’ compensation to the firm’s performance over a three- year period, the memo said. One-third will be tied to the firm’s return on equity, another third to ROE compared with peers, and the last third tied to total shareholder return on a relative basis, the memo said.

Profit Decline

Mack, who received a $40 million all-stock bonus in 2006, is forgoing his bonus for the second consecutive year. Chammah, 54, and Gorman, 50, were promoted to co-presidents a year ago, succeeding Zoe Cruz and Robert Scully. Chammah was awarded an $8.9 million stock bonus last year, while Gorman received stock valued at $7.98 million. Their salaries and any cash bonuses for 2007 weren’t disclosed. The salaries received by their predecessors were $500,000, the proxy showed.

Morgan Stanley’s nine-month profit dropped 41 percent from a year ago, and analysts expect a fourth-quarter loss. The firm’s compensation expense for the nine months ended Aug. 31 fell 20 percent to $10.7 billion from the same period in fiscal 2007 and in line with a 20 percent drop in revenue.

New York Attorney General Andrew Cuomo and U.S. Representative Henry Waxman, a California Democrat, have demanded that nine banks that received $125 billion of taxpayer money furnish details about their bonus plans.

“Morgan Stanley and Mr. Mack have taken a smart and prudent first step,” Cuomo said today in an e-mailed statement. “American taxpayers have seen their investments crater while simultaneously having to fund the Wall Street bailout with billions of their tax dollars.”

Morgan Stanley rose 58 cents, or 3.7 percent, to $16.30 in New York Stock Exchange Composite trading today. The shares have dropped 69 percent this year.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.

Last Updated: December 8, 2008 16:55 EST