Morgan Stanley’s reported move to defer 100% of 2012 bonuses for high-earning employees is the crescendo of a trend of big banks deferring more pay in recent years.
It’s the second straight year of big deferrals at Morgan Stanley, which a year ago held back 75% of bonuses for traders, investment bankers, and other high earners after having been at the 40% level the previous two years.
The strategy may be meant, in part, to delay accounting charges for the compensation to future years when the bank presumably expects to have better results. By any measure, it’s been a difficult year for Morgan Stanley. For example, through the first three quarters of 2012, net income from continuing operations was $93 million in the red, compared with a $4.9 billion profit in the first nine months of 2011. (Fourth-quarter results are expected to be announced on Thursday.)
Another, perhaps equal motivation is that shareholders, regulators, and commentators all like it when banks defer bonuses, says Alan Johnson of Johnson Associates, a compensation consulting firm specializing in the financial-services sector.
The deferred 2012 bonuses, which apply to employees with income above $350,000 and bonuses of at least $50,000, are to be paid half in cash and half in stock in four installments starting this May and stretching over the next three years, according to sources close to the matter.
Morgan Stanley employees are reportedly unhappy with the 100% deferral. Adept communication is the key to avoiding such a reaction, says Johnson. Banks deferring a large portion of bonus pay, with much of the compensation to come in the form of stock, should point out to employees that the deferral actually gives them a chance to make a lot more money, he counsels. Morgan Stanley stock closed Tuesday at $20.43. That actually was higher than it had been trading since mid-2011, but in the second half of 2009 and the first half of 2010, the stock was often near or slightly above $30.
Noting that the size of deferrals first started growing after the financial crisis settled in, Johnson observes that “in many cases, the bankers and traders ended up making more money than they ever did” as bank stocks recovered over the next couple of years. “Morgan should say we’re at a low stock price now,” he says, “but in three years we’ll double that.” And there certainly is plenty of room for such growth: before the crisis, in 2006 and 2007, the stock was trading at about $60.
Most bonus-eligible employees will likely ride out the three-year period, since they generally will lose any unpaid bonus amounts if they quit. That’s a third likely motivation for the deferral: locking in talent.
But a third year of high deferrals could dilute the benefit Morgan Stanley derives from the strategy. If bonuses were to be deferred several years in a row, in the future employees would be collecting deferred pay for multiple years simultaneously, so the advantage of having delayed accounting charges could be almost moot. And it might prove hard to stop deferring bonus pay, because of the accounting hit that would then occur. “If you keep doing it, you’ve lost the benefit and you’ll have more pain when you stop,” says Johnson.
Indeed, there is a natural limit to the trend, he says. Large deferrals have been seen only among the world’s 20 or so big global banks. “Asset-management firms, hedge funds, and privately held and boutique banks don’t defer nearly as much, so a bank that goes all the way with this will be out of synch with them, which is a competitive factor,” Johnson says.
Morgan Stanley declined to comment.