Morgan Stanley Chief Executive Officer James Gorman is set to lose stock once valued at almost $2.9 million as the bank misses profitability and share-performance goals.
Gorman, 54, probably will forfeit so-called performance-based stock units awarded in 2009 that required the New York-based firm earn a 12 percent average return on equity and have shareholder gains ranking in the top half of a 10-company group during his first three years as CEO. He could have earned shares worth almost $6 million if he exceeded those goals.
Instead, Morgan Stanley has produced an ROE of less than 6 percent with one quarter remaining and ranks ninth in its peer group in terms of shareholder return, beating only Credit Suisse Group AG. Gorman, who’s criticized Wall Street pay as too high, has pledged to improve results, in part by shrinking fixed-income trading and buying the rest of a brokerage joint venture.
“With pay for performance, you don’t always get paid,” said Rose Marie Orens, a senior partner at New York-based Compensation Advisory Partners LLC. “If you always got paid, we’d have to wonder how you stacked the deck. This plan is not a walk in the park, it sounds like they really did set up a performance plan that made sense.”
Colm Kelleher, 55, who now oversees the firm’s trading division, received performance-based stock units, or PSUs, valued at $2.36 million, according to the bank’s 2010 proxy filing. Ken deRegt, 56, then-chief risk officer who now runs fixed-income trading, got $1.87 million of PSUs.
While executives don’t like missing out on the payments, the plan shows investors the bank is committed to rewarding real performance, Orens said. Citigroup Inc. faced criticism after then-CEO Vikram Pandit, 55, who resigned this week, had his pay package rejected by shareholders in a nonbinding vote in April.
Directors had awarded Pandit about $15 million in total compensation for 2011 and granted him a separate, multiyear retention package that was potentially worth $40 million. Citigroup shares slumped 44 percent in the year, prompting more than half of shareholders to oppose the executive compensation.
About 95 percent of Morgan Stanley shareholders approved the firm’s executive compensation for 2011, in which Gorman’s pay was cut by a quarter to $10.5 million and included $1.94 million of PSUs. The $2.85 million in PSUs, now worth $1.73 million as the firm’s share price has decreased, were part of a $15 million pay package for 2009.
Banks haven’t cut compensation enough when faced with falling profits and “the industry is still overpaid,” Gorman said in an interview with the Financial Times published this month. Morgan Stanley will consider a new round of cost-cutting next year, and that could include lower pay, Gorman told the FT.
Gorman bought 100,000 shares of Morgan Stanley in August 2011 as a sign of confidence after the stock dropped 19 percent in two weeks. He owns 1.18 million shares, according to a regulatory filing, valued at $21 million at yesterday’s closing price.
Gorman could still receive a fraction of the 2009 award. He would get one-eighth of the shares if Morgan Stanley exceeds the total shareholder return of another bank to move into eighth place in the group. Morgan Stanley has slid about 40 percent since the end of 2009. Bank of America Corp., which has dropped about 38 percent, is the only firm within 10 percentage points of Morgan Stanley’s decline.
He could receive an additional one-eighth of the award if the firm’s ROE averages 7.5 percent over the three years, excluding the effect of accounting adjustments related to Morgan Stanley’s own credit spreads, known as DVA. The bank would have to earn more than $5 billion in the fourth quarter to reach that mark, a total larger than it produced in the previous two years combined.
Wesley McDade, a Morgan Stanley spokesman, declined to comment on Gorman’s compensation.
The macroeconomic environment has probably been worse than the bank anticipated when it set the goals, said Joseph Sorrentino, a managing director at Steven Hall & Partners, a compensation-consulting firm in New York. Still, given the public scrutiny surrounding Wall Street pay, the company must stick to targets, he said.
“If you’re talking about senior executives, modifying those goals after the fact in today’s environment is just not possible,” Sorrentino said.
Morgan Stanley did tweak the metrics in subsequent years’ awards. Gorman was given $1.94 million of the PSUs for each of the past two years.
For 2010, the bank placed a larger weight on ROE earned in 2013 than in 2011. In last year’s deal, Morgan Stanley lowered the benchmark for ROE to 10 percent and excluded certain sales of businesses and legal costs. The bank also replaced the group of rival firms with a comparison to the 81-company Standard & Poor’s 500 Financials Index.
Some top Wells Fargo & Co. executives will be beneficiaries of awards tied to performance, as they’re set to receive payouts almost double the original amount. The San Francisco-based bank gave CEO John Stumpf, 59, and other executives retention bonuses in December 2009 tied to the firm earning a higher ROE than half the lenders in the KBW Bank Index for the three years ended 2012.
Wells Fargo is poised to finish in the top quartile of the 24-company index on that measure, according to data compiled by Bloomberg, meaning the executives would get 1.5 times the amount of stock they were originally set to receive. For Stumpf, that means he’d get shares valued at $19.7 million from a bonus that was originally worth $10.3 million.
Bank of America and Goldman Sachs Group Inc. have also given executives bonuses tied to future performance. Bank of America CEO Brian T. Moynihan, 53, and his deputies received PSUs for 2010 and last year that are based on reaching a return-on-assets target at some point between 2011 and 2016. Moynihan received his entire $9.05 million bonus in the PSUs for 2010.
Goldman Sachs in February 2011 gave its named executives, including CEO Lloyd C. Blankfein, 58, a performance-tied deferred cash bonus of $7 million separate from year-end pay. The full bonus would be given if the firm averaged a 10 percent ROE and 7 percent growth in book value per share over three years. The company can decide by the end of December to extend by five years the period in which it can achieve those goals.
Goldman Sachs gave a similar bonus of $3 million in February.
“They’ve become quite common, and they are very much a response to the feeling that given how our shareholders fared, we need to have something in our pay program that demonstrates financial performance,” Orens said.