Morgan Stanley is taking three years to pay out 2012 bonuses to high-earning employees, three sources familiar with the situation said on Tuesday, a step that will better align incentives with shareholder interests and make it harder for employees to leave.
Banks globally are rethinking compensation as trading volumes sag, tighter regulations cut into profit, and revenues grow slowly, if at all. Barclays and Deutsche Bank are cutting 2012 bonuses for investment bankers by up to 20 per cent.
Morgan Stanley is deferring bonuses for all employees, except for retail brokers, who make more than US$350,000 ($417,165) annually and whose bonuses are at least US$50,000, one of the sources said.
The long deferral in cash payouts for high earners is unusual, but more banks will likely follow suit, said Joe Sorrentino, managing director of Steven Hall & Partners, a New York-based executive compensation firm.
"Many investors should be pleased by this, but employees might not be," Sorrentino said.
Deferring compensation can ensure that bankers and traders do not receive high pay for transactions that generate near-term profits and longer-term headaches. Morgan Stanley chief executive James Gorman said in June that the bank wants to reward employees in a way that helps bank shareholders.
Investors have been pressing Morgan Stanley to rethink its compensation practices for years. A Wall Street Journal report on Tuesday said that a hedge fund that invests in Morgan was focusing on executive pay at the bank.
Details about 2012 bonuses will be communicated to employees on Thursday, the day before the bank posts fourth quarter earnings, said the sources, who asked not to be named because the matter is not public.
Mark Lake, a Morgan Stanley spokesman, declined to comment.
The new bonus plan will be paid out half in cash and half in stock. High earners will receive 25 per cent of their cash bonus in May, another 25 per cent in December, another 25 per cent in December 2014, and the final 25 per cent in December 2015, according to two of the sources.
For the stock portion, 25 per cent of the equity award will be paid out at the end of this year, 25 per cent at the end of 2014, and the final half at the end of 2015, the sources said.
Employees who make less than US$350,000 annually and whose bonuses total less than US$50,000 will receive their full cash bonuses in February, one of the sources said.
Morgan Stanley and other big banks have been deferring more compensation in recent years. For 2011, Morgan Stanley employees who made more than US$250,000 annually got deferred bonuses with a US$125,000 cap on cash bonuses. Cash bonuses were distributed over a two-year period, while equity was given over a three-year period.
Some smaller banks are trying to attract more talent by deferring less. Jefferies Group, for example, is paying its employees bonuses all in cash.
In 2011, representatives from mutual funds pressed executives at the bank to pay a smaller percentage of the bank's revenue out to employees.
Last week, Daniel Loeb, who runs hedge fund firm Third Point LLC, criticised board compensation at Morgan Stanley in a letter to clients. Loeb has also started to scrutinise how much Morgan Stanley pays its executives, according to a report in The Wall Street Journal. Representatives for Third Point and Morgan Stanley declined to comment.
Earlier this month, Morgan Stanley announced it was cutting 1600 jobs to cut costs.
Deferring cash compensation is one way to appease shareholders and cut costs, even if the bank still has to ultimately pay out the money, said Richard Lipstein, managing director with the recruiting firm Gilbert Tweed International.
"Given the short term nature of the markets, delaying costs makes you look good today and damned what happens tomorrow," Lipstein said.