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Morgan Stanley Said to Expect 2010 Bonus Pool Will Shrink as Much as 30%

Morgan Stanley, the sixth-largest U.S. bank by assets, has told some employees to expect investment banking bonuses to decline 10 percent to 30 percent, according to two people briefed on the matter.

Managers are being told of the reduced pool as they prepare to make year-end bonus decisions, said the people, who declined to be named because the discussions are private. The pay levels haven’t been set and employees at the New York-based firm won’t be told their bonus until January, one of the people said.

Chief Executive Officer James Gorman has promised to reduce the portion of the company’s overall revenue awarded in compensation after it surged to 62 percent last year. He said last month that Wall Street must fix a culture that contributed to the financial crisis by idolizing individual employees and giving them incentives to take outsized risks.

Fixing the culture will require “creating a compensation system that better aligns or balances shareholders’ interests and the broader society’s interests with the individual’s interests, and changing the perception that it’s the individual that’s the hero,” Gorman, 52, said in November. “As an industry, we can have larger-than-life personalities, but individuals don’t make institutions.”

Photographer: Jin Lee/Bloomberg

Chief Executive Officer James Gorman has promised to reduce the portion of the company’s overall revenue awarded in compensation after it surged to 62 percent last year. Close

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Photographer: Jin Lee/Bloomberg

Chief Executive Officer James Gorman has promised to reduce the portion of the company’s overall revenue awarded in compensation after it surged to 62 percent last year.

Morgan Stanley cut the investment bank’s compensation pool 8 percent in the first nine months of this year to $5.3 billion. Overall, the company set aside $12 billion for compensation and benefits, or 50 percent of revenue, in the nine-month period.

Retaining Talent

“Our long-term success depends on retaining the best people, and we are committed to paying competitively,” said Mark Lake, a Morgan Stanley spokesman.

The cut in investment bank bonuses may not be unique to Morgan Stanley. Compensation for trading and investment banking employees is likely to be down 22 percent to 28 percent from last year, said Michael Karp, CEO of Options Group, an executive search and compensation consultant firm in New York.

“This is going to be Street-wide, not just one firm,” Karp said. “The revenue hasn’t been as great as last year, and coupled with a tough regulatory environment and banks being closely watched by governments globally, it’s not an easy pay environment.”

Compensation expenses at Goldman Sachs Group Inc. in the first nine months was 21 percent less than a year earlier, while the pay pool at JPMorgan Chase & Co.’s investment bank was down 10 percent. Both of those New York-based firms slashed their compensation pool in the fourth quarter last year as banks faced pressure from lawmakers and shareholders over pay packages.

Bonus Predictions

About 71 percent of 2,145 people who responded to an eFinancialCareers.com e-mailed poll in the U.S. said they are anticipating at least an equal bonus from last year, with 50 percent expecting a bigger payout. About 11 percent said their bonus will jump by at least half, according to the survey released in October.

Fixed-income traders’ pay will probably fall as much as 30 percent this year, according to a report from New York-based compensation consultants Johnson Associates Inc. Compensation for merger advisers will be flat to 5 percent higher, and investment bankers who manage stock and bond sales will see a range between 5 percent up and 5 percent down, the report said.

“Compensation trends are going to be very well-watched over the next couple of years,” Karp said. “There will always be some top players across the board making good money, but I think in general we are seeing the pay trend going down.”

Brokerage Impact

Compensation at Morgan Stanley’s brokerage unit won’t be affected as it is largely based on a fixed formula and is less dependent on year-end bonuses. The brokerage’s pay pool climbed 41 percent to $5.8 billion so far in 2010. This is the firm’s first full year of owning a joint venture with Citigroup Inc.’s Smith Barney.

The investment bank’s pay pool represented 42 percent of revenue, while the brokerage set aside 63 percent of revenue.

Morgan Stanley last year instituted clawbacks that allow the bank to take back compensation if an employee engages in conduct that hurts the firm in the years after it was paid. The company also paid a greater portion of year-end bonuses in stock to tie individual pay to the company’s performance.

Gorman, who became CEO this year after leading the firm’s wealth-management unit, was paid $15.1 million in salary and bonus for 2009. About $8.6 million of the pay can be clawed back or is dependent on the company meeting performance measures. Gorman declined a bonus in 2008.

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

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