Morgan Stanley Adopts Clawback Plan

Morgan Stanley's bonus overhaul outlined Monday applies clawbacks both more broadly and more aggressively than a similar plan unveiled by UBS three weeks ago.

The new Morgan Stanley program starts with this year's bonuses and covers all bonus-eligible employees. In contrast, the UBS reforms begin next year and are limited to corporate executives, division leaders and designated "risk takers" who trade significant amounts of the bank's capital.

"In 2008 and beyond, for all bonus-eligible employees, we are making part of the year-end bonus deferral a cash award subject to a clawback provision that could be triggered if the individual engages in conduct detrimental to the Firm," Morgan Stanley Chief Executive John Mack wrote in a memo to employees, published in the New York Times. "The clawback could be triggered if an individual, for example, caused the need for a restatement of results, a significant financial loss or other reputational harm to the Firm or one of its businesses."

As in UBS's new "bonus/malus" system, Morgan Stanley will divide each affected employee's year-end compensation into a current cash payout, a deferred cash component subject to clawback over three years, and an equity component that also vests over three years. The bank also said this year's bonuses won't include any stock options.

Said to Affect 7,000 Employees

Also similar to UBS, Morgan Stanley said its new bonus system aims to tie compensation more closely "to multi-year performance and each employee's contribution to the Firm's sustainable profitability."

The Times says 7,000 Morgan Stanley employees will be subject to the bonus clawback provisions. The UBS plan's scope is narrower. Although the Swiss bank has yet to define exactly who will be affected, it has said the current variable compensation system won't change "for the majority of employees." The Times of London, without stating a source, said the bonus overhaul would cover 2,000 of UBS's 80,000 employees.

The ball now passes to other global investment houses, who face ongoing pressure from lawmakers and the public to show they won't reward executives or employees for taking excessive risks or generating profits that later prove illusory.

Mack's memo also disclosed that 2008 year-end pay for Morgan Stanley's 14-person operating committee will average 75 percent below last year, and the broader management committee will be paid 65 percent less than last year on average. Mack and co-presidents James Gorman and Waliid Chammah will "forgo" any bonuses for 2008.

Decisions about year-end compensation for all Morgan Stanley employees will be finalized "in the coming weeks," the memo says. Predictably, its adds that the entire bonus pool "will be down dramatically this year, reflecting the difficult market conditions, stock price performance and our full-year revenues in this challenging environment."