Wall Street Pay Gets Tougher Look?
The activist investor whose firm last week disclosed that it bought a stake in Morgan Stanley has started prodding the securities firm about how much it pays top executives.Interestingly, Morgan Stanley just announced it will defer high-earners' bonuses:
Daniel Loeb, who runs hedge-fund firm Third Point LLC, has raised questions about whether compensation levels at Morgan Stanley are justified given the New York company's size and relative simplicity compared with larger banks, said a person familiar with his thinking.
Mr. Loeb hasn't singled out any executive he thinks is overpaid. But the questions indicate a tougher stance by Third Point than it let on in Wednesday's announcement of the purchase of an unspecified number shares of Morgan Stanley, which it said "is in the early innings of a turnaround."
In a letter to clients last week that was viewed by The Wall Street Journal, Third Point criticized Morgan Stanley's pay for directors, which surpassed J.P. Morgan Chase & Co. and Citigroup Inc. "although Morgan Stanley is a substantially smaller and simpler bank."
Mr. Loeb now is scrutinizing pay practices at Morgan Stanley more widely, including the compensation of Chairman and Chief Executive James Gorman. In 2010 and 2011, executives whose pay is disclosed in proxy filings by the company received a total of $130.1 million, up from $50.1 million in 2008 and 2009, when many took little or no bonus because of the financial crisis.
Morgan Stanley is expected to disclose later this month the stock-based compensation for its top officers. Many employees will learn this week the size of their 2012 bonuses, and some overall details are expected when it reports fourth-quarter results Friday. Payouts are likely to fall from a year ago, people familiar with the firm said.
Mr. Loeb has indicated to people close to him that in some cases he feels the pay is appropriate, given the tricky balancing act needed to hold on to talented employees and placate restive shareholders while Mr. Gorman tries to rejuvenate the company.
Last week, Third Point said Morgan Stanley shares "should nearly double" if Mr. Gorman continues to build up the brokerage business and works on a "bold fix" for "struggling" bond-trading businesses. On Monday, Morgan Stanley shares slipped 10 cents to $20.07 in New York Stock Exchange composite trading at 4 p.m. The stock price peaked near $90 in 2000.
A Morgan Stanley spokeswoman said that Mr. Gorman "reached out to Mr. Loeb and welcomed him as a new investor and said he was pleased that Mr. Loeb shared his view on the future upside performance of Morgan Stanley and its stock."
Mr. Loeb, chief executive of Third Point, which manages about $10 billion in assets, concluded that Ruth Porat, a former investment banker who became Morgan Stanley's finance chief in 2010, is fairly compensated, according to a person familiar with his thinking. Last year, she was awarded an $8.75 million package of cash, shares and other deferred compensation, ranking fourth among the chief financial officers at six big U.S. banks. The fund manager made his decision about Ms. Porat's pay after speaking to people who know her well, this person added.
Morgan Stanley is smaller than many of its fiercest rivals in trading, investment banking and pitching stocks and bonds to investors, yet it still has a complex balance sheet and substantial operations in risky markets such as derivatives and commodities. Since taking the top job in 2010, Mr. Gorman has been trying to build up relatively stable businesses such as retail brokerage, while turning around struggling units like bond trading.
"If we did not believe Morgan Stanley's management was up to these important tasks, we would not own such a significant position," Mr. Loeb's firm told clients last week in its letter.
One potential source of friction likely will be resolved when Morgan Stanley director Roy Bostock, 72 years old, retires this spring.
Last week's letter criticized Mr. Bostock, a former Yahoo Inc. chairman, without identifying him by name. Mr. Loeb clashed with Mr. Bostock until the hedge-fund manager muscled his way onto Yahoo's board as part of a Third Point-led shake-up. Mr. Bostock couldn't be reached Monday for comment.
In investment banking, some critics have called on Morgan Stanley to lower compensation for Michael Grimes, the star technology banker who helped take Facebook Inc. public last May. Mr. Grimes's pay in 2011 was an estimated $6 million.
Facebook stock is down nearly 20% since then, and Morgan Stanley last month agreed to pay $5 million to settle allegations from Massachusetts regulators that Mr. Grimes tried to improperly influence research analysts before the initial public offering. The firm didn't admit or deny the allegations.
The deferred bonuses will be paid out over a three-year period, meaning that employees will not receive their full bonuses for 2012 until the end of 2015. It could not be determined what the level of bonuses will be.Compensation is a hot topic on Wall Street this time of year. Most are bracing for big cuts. They know the good years are over.
The bonus details will be communicated to employees on Thursday, said the sources, who asked not to be named because the matter is not public.
Mark Lane, a Morgan Stanley spokesman, declined to comment.
One source said the change is being made to better align employee incentives with shareholders and to appease regulators.
Under the new bonus plan, which 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.
Reuters reports that Credit Suisse will cut the bonus pool by 20 percent and the WSJ reports that JP Morgan Chases & Co.'s board is expected to dock the 2012 bonuses of Chief Executive James Dimon and another top executive because of the "London Whale" trading debacle.
Even Bernie Madoff -- yes, the scumbag billionaire who ran the biggest Ponzi scheme ever before getting caught after Harry Markopolos exposed him -- chimed in to attack Wall Street compensation. In a letter to the CNBC, Madoff blasts Wall Street signing bonuses:
"The real problem with the signing bonuses is that pressure that the new firms put on their bonus babies to generate large commissions by promoting special products of the new firm to pay off those bonus costs. This problem dates back some thirty years and lead to the demise of Bache & Co. selling their oil and gas (limited) partnerships. As hard as the (Securities Industry Association) federal regulation committee, on which I served, tried to stop this practice, we never could," Madoff writes.But don't shed a tear for banksters. They will find new ways to generate fees to bolster their return on equity and pump up their bonuses. While Dodd-Frank and Basel III are a nuisance, they have discovered thy glory of collateral transformation and are busy figuring out new ways to stick it to their clients.
Having said this, the financial services industry is in the midst of a long bear market. Banks know that their most talented traders are going to jump ship to join a hedge fund or start heir own fund. Can you blame them? The internal politics and regulations at these big banks are brutal and top talent will always look for the best compensation for their performance.
But let me be upfront with all these Wall Street traders looking to join hedge funds or start their own fund. The good old years for hedge funds are also over. Sophisticated institutional investors are squeezing funds hard on fees and demanding a hell of a lot more, and with good reason. Most hedge funds stink, delivering lousy performance and not hedging against downside risk. And if you think working at a hedge fund or starting your own fund is easy, think again, very few survive and thrive in this ultra competitive industry.
Below, the Wall Street Journal's Francesco Guerrera discusses how all-cash bonuses are making a comeback on Wall Street. And Ilana Weinstein, Founder & CEO of IDW Group, discusses bonuses and compensation at Wall Street's top investment banking firms and who's hiring at hedge funds.
Ms. Weinstein is a very sharp lady. Listen carefully to what she says about Wall Street bonuses, hedge fund compensation, the long-term trend in the financial services industry and Manhattan real estate.