Last Thursday, Morgan Stanley announced that everyone on both the banking and brokerage sides of the firm who gets a substantial bonus—everyone from bankers to traders to branch office managers—will now be seeing 35 to 50 percent of that bonus compensation deferred, a knowledgeable source from the firm told Registered Rep. magazine. The change will affect 2010 bonus money, which is paid in 2011.
Not surprisingly, BOMs were not happy about the news. In some cases, bonuses account for as much as 75 percent of a BOMs annual compensation. “We just got hit with this and it affects money we’ve already earned, said one MSSB Bom who requested anonymity, “since we don’t get our prior year’s bonus until late January or February of the new year. I think it’s completely reprehensible.”
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At Morgan Stanley, employee bonuses are comprised of both cash and stock units, the source said. Employees due large bonuses will now receive 50 to 65 percent of the cash portion upfront, with those due more money getting more upfront. The balance will be deferred. Of the deferred portion, 25 percent will be paid in July; another 25 percent will be paid in December; and the remaining 50 percent will be paid in July 2012, our source said. (Branch managers—and many other employees who get bonuses—already get 15 to 25 percent of their compensation in stock that vests after four years.)
The announcement comes after Morgan Stanley reported 35 percent increase in fourth-quarter profits, despite a dip this fall in fixed income trading revenues.
Many insiders believe the move reflects the new realities of Wall Street after the financial crisis. The Morgan Stanley source said there’s been a lot of backlash from the public about the high level of Wall Street bonuses. “The deferment process protects the firm and investors against employees who don’t continue to perform as they should,” he said. “It keeps them in check.”
Rick Peterson, who heads Rick Peterson and Associates—a Houston-based—industry recruiting firm, and who recruits for Morgan Stanley Smith Barney, says he has not received irate phone calls from MSSB BoMs on this matter. “I usually hear from unhappy BoMs from various firms every day. But, not on this issue. I think everybody realizes this whole industry is being re-priced from the top all the way down.
“Branch managers at every firm are facing this,” he continues, “not even just the wires. And, every firm is doing it a little bit differently.”
Jeanne Branthover, head of Boyden Global Executive Search’s Financial Services Practice, expects deferring bonus comp will become standard practice in the industry. “We’re seeing a lot more deferred comp than in recent years. It is very likely the way things are going to be across the board—a best practice for the big firms. Otherwise, they would lose their employees to other firms. I think firms also want to hold onto their money for as long as they can.”
And, it is also viewed by firms as a way to improve employee performance. The restricted cash awards also are subject to a "clawback" provision that require recipients to reimburse the firm if the pay is based on profits that later turn out to have been overstated, Branthover explains.
On the other hand, this type of action may be firms’ way of indirectly implementing pay cuts, a BOM seeking anonymity told us. “It’s hard to prove because details on the reasons behind bonus deferrals have been a closely-guarded secret and have varied widely from firm to firm,” he said, “which is one of the reasons some regulators are pushing for more specific rules.”