Morgan Stanley is giving employees a greater portion of their bonuses up front as the bank seeks to structure pay in line with peers and lower expenses in future years.
The compensation committee of Morgan Stanley’s board agreed to defer future bonus pools at an average rate of 50 percent, down from about 80 percent last year, the company said on Friday in a regulatory filing.
The New York-based firm plans to take a fourth-quarter charge of as much as US$1.2 billion to cover the cost of accelerating vesting of deferred pay awarded in previous years, according to the filing.
The moves mark a reversal from Morgan Stanley’s efforts to defer more pay since the 2008 financial crisis to tie bankers to the firm and reduce immediate costs, peaking when it deferred 100 percent of 2012 bonuses for many senior bankers.
The early vesting of previous awards would allow more flexibility in managing future costs, Morgan Stanley chief executive officer James Gorman said in a memo to employees.
“Now that our business strategy is in place and the firm’s performance has stabilized, it is time to bring our deferral policy to an appropriate long-term level, in line with the rest of the industry,” Gorman wrote.
The compensation committee allowed previous deferred cash bonuses to vest on Monday last week, while the payment schedule on the awards is not changing, according to the memo.
That means the move is largely an accounting one, giving Morgan Stanley the ability to recognize the costs at once instead of over years.
The cost of deferred bonuses typically is recognized when the awards vest, meaning each year the bank has compensation expenses before it hands out any pay.
The firm said earlier this year that the total cost of deferred awards this year might be as much as US$2.57 billion.
Morgan Stanley increased its average deferral rate to 75 percent in 2011, up from 40 percent two years earlier, amid low profitability.
That was the first of three straight years with return on equity of less than 6 percent, and Gorman said at the time he was “acutely aware” of the impact of the decision on future years.
“Our financial performance over that time required us to defer far more bonus compensation than we felt appropriate from a competitive viewpoint,” Gorman said in the latest memo. “Our outsized deferrals over those years created a burden on future year earnings.”
The bank’s return on equity has risen to about 8 percent in the first nine months of this year and Gorman has set a target of 10 percent for next year.
Morgan Stanley shares rose 1.2 percent to close at US$37.24 in New York on Friday. Shares climbed 19 percent this year, the most among the five largest Wall Street banks.
The charge is going to be offset by a previously announced US$1.3 billion tax benefit the firm is set to recognize in the fourth quarter from changing its brokerage subsidiary to a corporation.
The process for determining the total amount of bonuses for this year has not changed, Gorman wrote in the memo, the contents of which were confirmed by Morgan Stanley spokesman Wesley McDade.
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