Morgan Stanley staff to pour bonuses into hedge funds

Morgan Stanley is said to be offering its staff the option to invest bonuses in its hedge funds. One headhunter says the firm is simply trying to offset its proclivity for paying below the market rate.

Bloomberg reports that the bank started a program last month allowing employees who earn at least $500,000 to invest part of their annual bonuses in the firm's hedge funds and leveraged buyout funds. It says Morgan Stanley will lend $2 for every $1 contributed to the funds, and that employees will be allowed to keep any gains - but only after three years have elapsed.

If the funds fall in value to the extent that an employee would have no equity left after repaying Morgan Stanley, Bloomberg says the loans will be forgivable.

The bank is also reported to have relaxed its limitations on restricted stock. Under new rules, bankers will reportedly be able to sell their shares in three years instead of five.

Morgan Stanley reportedly declined to comment.

Jason Kennedy of London-based search firm Kennedy Associates tells eFinancialCareers.com the new incentives are designed to stop staff defections to the likes of Credit Suisse, Merrill Lynch or Goldman Sachs, where vice presidents and upwards can earn 20%-30% more. "Once every three years or so Morgan Stanley do pay up," he says. "This is to stop people from leaving after being let down for two or three years running."

However Isabelle Martin Hotimsky of recruitment firm Korn/Ferry International says the pay incentive may backfire: "If the business doesn't do well, it will push people away. They have an incentive to stay with a well-performing business if they have their own money invested in it, but not if it's performing badly."

Martin Hotimsky says the option to invest a bank's own hedge funds and leveraged buyout funds is not commonplace at the moment, although pay deals hammered out with top bankers are usually hush-hush.