Morgan Stanley Chief Executive Officer James Gorman said Wall Street must fix a culture that contributed to the financial crisis by idolizing individuals as “heroes” and giving employees incentives to take outsized risks.
“There are a fair number of the senior folks who actually believe they are uniquely qualified on all issues relating to finance,” Gorman said today at a conference in New York. “As we saw, it’s just not true.”
Gorman, speaking at the Securities Industry and Financial Markets Association conference, said some individuals “who in many cases were frankly pretty average” made as much as 10 times that of people in other industries during the financial crisis. Lawmakers and regulators, including Treasury Secretary Timothy F. Geithner, have blamed excessive pay packages in the finance industry for encouraging risk-taking that contributed to the global credit contraction.
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. “As an industry, we can have larger-than-life personalities, but individuals don’t make institutions.”
Morgan Stanley last year instituted clawbacks that allow the New York-based 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.
“The more you have this hero individual status, and lots of things written about them by journalist friends in the paper, the more likely that they are going to act out, because they start to believe it,” Gorman said.
“You can put on a large trade, and if it works, you make out like a bandit, and if it doesn’t, you might get fired, but you’re not paying back,” he said. “So you have asymmetric risk, you either come out zero or you come out positive. That’s imbalance.”
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.