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Exclusive: Morgan Stanley to defer high-earners' bonuses - sources

A street sign stands near the Morgan Stanley worldwide headquarters building in New York May 8, 2009. REUTERS/Lucas Jackson
A street sign stands near the Morgan Stanley worldwide headquarters building in New York May 8, 2009. REUTERS/Lucas Jackson

By Nadia Damouni and Jessica Toonkel and Lauren Tara LaCapra

NEW YORK (Reuters) - 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

Morgan Stanley is deferring bonuses for all employees who make more than $350,000 annually and whose bonuses are at least $50,000, one of the sources said. The source said the deferral does not apply to retail brokers.

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 Stanley 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 paid out half in cash and half in stock. High earners will receive 25 percent of their cash bonus in May, another 25 percent in December, another 25 percent in December 2014, and the final 25 percent in December 2015, according to two of the sources.

For the stock portion, 25 percent of the equity award will be paid out at the end of this year, 25 percent at the end of 2014, and the final half at the end of 2015, the sources said.

Employees who make less than $350,000 annually and whose bonuses total less than $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 $250,000 annually got deferred bonuses with a $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.

Since taxpayer bailouts of large financial institutions in 2008, Wall Street bonuses have gotten an intense amount of public scrutiny. On Tuesday, Goldman Sachs Group Inc scrapped plans to delay paying bonuses to employees in Britain by two months. The plan, which would lower tax bills for those people, set of a firestorm of criticism from government officials.

INVESTOR PRESSURE

Morgan Stanley is trying to cut costs in a weak business environment that has hurt its ability to meet performance goals for two key units - bond trading and wealth management.

Several years ago, the company outlined a plan increase its trading market-share in fixed-income, currency and commodities by 2 percentage points. So far, the firm has failed to reach that goal, partly because of a ratings downgrade by Moody's last summer and an aggressive plan to cut exposure to complex products that require more capital.

In its wealth management division, Morgan Stanley has backed down from a target for a pretax profit margin of 20 percent, and is working to reach a more moderate "mid-teens" target by this summer. Gorman has made a big bet on this business with a complicated deal to acquire Citigroup Inc's Smith Barney business.

Analysts expect Morgan Stanley to report a 17 percent decline in 2012 revenue and flat annual earnings, according to Thomson Reuters I/B/E/S, because of weak trading volumes and dealmaking activity.

Investors have begun pressuring the firm to cut compensation, typically the biggest expense on Wall Street.

Reuters reported in October that top shareholders meeting with Morgan Stanley executives had demanded to know why the bank could not cut compensation to just 30 percent of revenue, down from current levels above 40 percent.

Last week, Daniel Loeb, who runs hedge fund firm Third Point LLC, criticized board compensation at Morgan Stanley in a letter to clients. Loeb also has started to scrutinize 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 1,600 jobs to cut costs, following a 7 percent headcount reduction last year. That initiative comes in addition to the plan to cut $1.4 billion in costs from its wealth-management unit over the long-term.

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.

(Reporting by Nadia Damouni, Jessica Toonkel, Lauren Tara LaCapra; editing by Jeffrey Benkoe, John Wallace, Leslie Adler, Bernard Orr; Editing by David Gregorio)

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