Morgan Stanley Expands Reasons to Claw Back Executive Pay

Morgan Stanley Sinks to Lowest Since 2008
Morgan Stanley headquarters in New York. Photographer: Daniel Acker/Bloomberg

Morgan Stanley, the investment bank that added clawback rules to compensation packages in 2008, expanded the types of pay that managers can be forced to return and the list of misconduct that might trigger a penalty.

All long-term incentive pay for top executives named in the annual compensation table will be covered by the new rules, the New York-based firm said today in a proxy statement. Some lower-level employees also are subject to the policy. A clawback could be caused by an act or omission that triggers a restatement, or when the person violates risk policies and standards, even if the impact on results is favorable, Morgan Stanley said.

“They seem to be a first-mover in terms of being extremely aggressive in the clawback provisions,” said Joseph Sorrentino, a managing director at Steven Hall & Partners, a compensation-consulting firm. “You’re likely to see other financial-services firms adopt something similar.”

The 2008 credit crisis and bailout of the financial industry has put pressure on banks to tie compensation more closely to actual results. Regulators criticized pay systems that awarded bonuses upfront on transactions that turned out to be disastrously unprofitable in later years.

Morgan Stanley can take back deferred cash-based awards if the managers cause “substantial financial loss on a trading strategy, investment, commitment or other holding originating either in the current year or in any prior year,” the bank said. Long-term incentive awards can be canceled for cause, which includes failing to meet “compliance, ethics or risk-management standards.”

Dodd-Frank Act

All employees that received a deferred-cash bonus are subject to the expanded rules, said Mark Lake, a spokesman for the firm. Morgan Stanley has used its clawback provision to recoup pay since it was first implemented, he said, without disclosing how often that has happened.

Some firms are waiting for clawback rules resulting from the Dodd-Frank Act, which the U.S. Securities and Exchange Commission may propose this year, Sorrentino said. While restatement triggers are common, it’s “unique” to have clawbacks for violating risk policies even when the impact on results is favorable, he said.

Chief Executive Officer James Gorman’s compensation for 2011 totaled $10.5 million, a 25 percent cut from 2010 as the firm’s shares fell by almost half. Morgan Stanley cut 2011 pay for senior investment bankers and traders by an average of 20 percent to 30 percent and capped immediate cash bonuses at $125,000, according to people briefed on the plans.

Total compensation for each member of the firm’s operating committee decreased at least 20 percent, and all members won’t receive an immediate cash bonus, one of the people said.

Missed Goals

“The company did not fully meet all of our priorities for the year -- which is reflected in the 2011 compensation decisions,” Morgan Stanley said in the proxy. The firm posted a 4 percent return on equity in 2011, below Gorman’s goal of “mid-teens.”

Gorman, 53, got $5.04 million in restricted shares, and $1.94 million in stock tied to company performance, according to the proxy filing. He also received a deferred cash bonus of $2.72 million that can be clawed back, in addition to his $800,000 salary.

The cancellation and clawback periods can last three years, according to the proxy. Morgan Stanley also lowered the maximum payout executives could receive from performance stock units, or PSUs, while making it easier for the firm to reach the return on equity target that determines half the award.

Pay Limits

Top managers can only earn a maximum of 1.5 times the stated amount of PSUs awarded for 2011 performance, down from 2 times in previous years, to discourage excessive risk-taking, the firm said today. It lowered the return on equity the company must achieve for executives to earn their stated amount to 10 percent from 12 percent, and reduced the minimum ROE that would result in any award to 6 percent from 7.5 percent.

Ruth Porat, 54, Morgan Stanley’s chief financial officer, received $8.75 million in total compensation for 2011, dropping from $11.5 million in 2010. The package included $3.2 million in restricted stock, $3.2 million in deferred cash, $1.6 million in shares tied to company performance and a $750,000 salary.

Greg Fleming, 49, who runs the firm’s retail-brokerage and asset-management units, got $9.25 million. Paul J. Taubman, 51, and Colm Kelleher, 54, who together run the firm’s investment banking and trading division, also each received $9.25 million.

The firm reported compensation that the board granted based on 2011 performance, with some of the funds scheduled to be received in later years. The SEC mandates a disclosure of what executive officers actually got during the calendar year, which can include grants from previous years that came due. By that measure, Gorman’s package for 2011 was $13 million.

Morgan Stanley said it nominated Alcoa Inc. CEO Klaus Kleinfeld to join its board of directors. Kleinfeld will replace Sprint Nextel Corp. Chairman James H. Hance, who notified the company March 30 that he won’t stand for re-election at the annual meeting on May 15.

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