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Note: According to Morgan Stanley's August 7, 2009 report of voting results for its 2009 annual meeting, shareholders voted 94% in support of the "Say on Pay" resolution to approve the compensation of its executive officers. The compensation of the broader group of company executives addressed in the article below was not submitted for shareholder approval, and is not generally included in "Say on Pay" proposals.


Wall Street Journal, February 10, 2010 article


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Morgan Stanley Gets Earful on Pay

Morgan Stanley Chief Executive James Gorman's pledge last week to reduce the firm's compensation ratio followed prodding from some large shareholders about unusually high employee payouts in 2009, according to people familiar with the situation.

Company officials acknowledge being questioned by investors since Morgan Stanley reported three weeks ago that compensation and benefits last year were equal to 62% of net revenue at the New York company.

That was the highest percentage in a decade and far exceeded that of rival Goldman Sachs Group Inc., which had nearly 10 times as much net income as Morgan Stanley did.

Morgan Stanley says Mr. Gorman's declaration that the firm's compensation ratio had peaked at a "historic high" that "nobody on my management team...will ever see again" wasn't triggered by outside pressure. And there are no signs of a shareholder rebellion that could lead to en masse dumping of Morgan Stanley shares or embarrassment at this spring's annual meeting.

Nevertheless, the company is preparing to take additional steps beyond the recent restructuring of its compensation system to show it is responsive to shareholder concerns. According to a person familiar with the thinking of Morgan Stanley directors, the board is expected to approve a nonbinding say-on-pay proposal that would be included on the next shareholder proxy statement.

A final decision hasn't been made, this person said. Financial firms American Express Co., Bank of America Corp., Goldman and J.P. Morgan Chase & Co. are making similar moves.

Mr. Gorman, who took over as CEO on Jan. 1, and other Morgan Stanley executives have been fielding questions about pay levels for months. The firm's compensation ratio surged as the company's revenues suffered amid sluggish trading performance and a sharp increase in the value of Morgan Stanley's liabilities.

Some shareholders say those discussions gained momentum as public ire over Wall Street's pay culture intensified.

"Shareholders used to let it go because that's just the way it was," says one official at a large Morgan Stanley shareholder. Now, though, "you might see some change, and it's a good outcome."

A company spokesman declined to comment on the firm's one-on-one meetings with shareholders. "In response to feedback from shareholders, Morgan Stanley has over the past two years fundamentally restructured the way it pays its people," he said.

"I was disappointed in their compensation ratio" for 2009, says Michael Levine, a portfolio manager at OppenheimerFunds Inc. who runs a mutual fund with $9 million of Morgan Stanley shares. "I'm willing to give them a free pass given the decline in revenue" last year, "but going forward, there needs to be an attitude that shareholders are first in line."

Mr. Gorman's vow to reduce the firm's compensation ratio came during some of his first public comments as CEO. After finishing his presentation, Mr. Gorman took questions from shareholders. The first one: By how much does he expect pay to decline?

Keeping pay near current levels would help Morgan Stanley continue to hire new traders and keep those who are doing a good job.

Some people inside the company say Mr. Gorman has been reluctant at times to grant large bonuses to employees who are benefiting more from the recently strong market than by generating revenues that other employees can't.

Still, last year's $14.4 billion in compensation and benefits exposed Morgan Stanley to criticism because it had just $1.41 billion in profits.

The overall payout was "high relative to peers," which "puts a significant amount of pressure on the company's compensation committee to explain in a compelling and clear manner why," says Hye-Won Choi, head of corporate governance at TIAA-CREF, which owned about $335 million of Morgan Stanley shares according to its most recent regulatory filing and Morgan Stanley's stock price Tuesday.

Ms. Choi says TIAA-CREF plans to discuss its concerns with Morgan Stanley in the coming weeks.


A say-on-pay vote proposed by investment firm Calvert Asset Management Co. would give shareholders a nonbinding vote on the company's pay practices. Last year, Morgan Stanley and other large U.S. financial firms that received government aid were required to have a similar measure on the ballot. At Morgan Stanley, more than 90% of the shares voted in favor of the company's pay plans.

Stu Dalheim, director of shareholder advocacy at Calvert, says it is important for Morgan Stanley to give shareholders another vote on pay. He cites the commitment of other banks to allow a vote and the company's executive compensation for 2009.

By some measures, Morgan Stanley's pay in 2009 wasn't off the charts. It fell below the record high in 2007. Since Morgan acquired control of Citigroup Inc.'s Smith Barney brokerage force, pay per employee declined to $235,000, the lowest figure in at least seven years.

In addition, Morgan Stanley Chairman John Mack took no bonus in his last three years as CEO, including 2009. The company also is de-emphasizing cash bonuses in favor of salaries, stock-based bonuses and other deferred cash- and share-based plans that don't pay out unless employees meet certain benchmarks over a three-year period.

Mr. Gorman suggested last week that he'll work to bring the compensation ratio to 50% or lower by delivering higher revenue. Most analysts are optimistic he can do it, in part because Morgan Stanley isn't expected to feel the same impact of its own debt-price moves this year. In 2009, excluding the impact of those debt prices increasing would have given Morgan Stanley a pay ratio of only 50%.

If 2010 compensation remains at 2009 levels, that would represent about 41% of the $35 billion in revenue projected by analysts surveyed by Thomson Reuters. But that also would likely anger traders and investment bankers hoping for bigger bonuses.

The growing brokerage force at Morgan Stanley also raises the company's overall pay ratios versus rivals like Goldman that don't have similar units. Brokers often work for pre-set commissions that eat up 50% or more of the revenues they generate.

Goldman paid 36% of its net revenue as compensation in 2009 amid heavy scrutiny from shareholders and politicians. The company's restraint helped lead to a record year of profits for the company.

—Susanne Craig contributed to this article.

Write to Aaron Lucchetti at


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