Morgan Stanley Gives Employees Incentives to Avoid Defections

First Published:	02/10/2006 13:27:35
Morgan Stanley, the world's biggest securities firm by market value, is offering its top-paid traders and bankers millions of dollars worth of incentives to avoid defections to rival banks. Chief Executive Officer John Mack started a program last month that allows employees who earn at least $500,000 to invest part of their annual bonus in the firm's hedge funds and leveraged buyout funds, said four people familiar with the plan. New York-based Morgan Stanley will lend $2 for every $1 they contribute to the funds, the people said. Anyone who leaves before three years forfeits the investments and any gains. The incentives give Mack a lure to keep his biggest moneymakers from taking jobs at Goldman Sachs Group Inc. or Lehman Brothers Holdings Inc., where they can make 10 percent to 20 percent more, said Jason Kennedy, who runs London-based recruitment firm Kennedy Associates. Morgan Stanley paid Co- President Zoe Cruz about $21 million in 2005, almost 50 percent less than her then-counterpart at Goldman, Lloyd Blankfein. ``Morgan Stanley isn't very competitive in terms of compensation versus the market,'' Kennedy said. ``They're doing this to lock in their staff.'' Morgan Stanley spokeswoman Marie Ali declined to comment. Bonuses make up the majority of pay for most senior employees on Wall Street, and securities firms typically tie up much of that compensation in stock that can't be sold for several years. In Cruz's case, $13.6 million of her pay last year was in so-called restricted stock. Low-Interest Loans Morgan Stanley will offer low-interest loans so employees can triple the size of their investments in hedge funds and buyout funds, said the people, who declined to be identified because the firm hasn't announced the incentive publicly. Hedge funds are largely unregulated pools of capital that allow managers to participate substantially in gains on the money invested. Buyout funds acquire and sell companies, using borrowed money to increase returns. Mack's incentive program lets employees keep whatever gains they make on the borrowed funds, the people said. Money can't be withdrawn from the program for three years and the loans are forgivable if the funds decline enough that an employee would have no equity left after repaying Morgan Stanley. In addition to the loans, Morgan Stanley is relaxing limitations on restricted stock. Under the new rules, employees can sell these shares after three years instead of five. Morgan Stanley set aside an average $203,000 in compensation and benefits for each of its 54,000 employees during the first nine months of its fiscal year. The firm has more than twice the staff of New York-based Goldman and Lehman because it runs a retail brokerage and the Discover credit card in addition to its investment bank. Goldman Pay Goldman's compensation and benefits totaled $542,000 per employee and Lehman set aside about $260,000 in the same period, according to financial reports released by the firms last month. Kennedy estimated that about 10 percent of Morgan Stanley's employees will earn more than $500,000 this year. Under Mack's program, dubbed the ``leveraged co-investment plan,'' Morgan Stanley will allow those top earners to invest the equivalent of 30 percent of their stock bonus in the firm's hedge funds and LBO funds, said the people familiar. Competition for the most-profitable traders and bankers is intensifying among the biggest securities firms as profit growth in the industry slows from an average of more than 20 percent over the past two years. Morgan Stanley has hired at least 12 bankers, traders and managers from its Wall Street rivals since the end of June and lost 11 to the same group of firms. Earnings Turnaround Mack, 61, wants to avoid defections after leading a turnaround at the company, which last month reported that third- quarter earnings from continuing operations rose 59 percent to $1.85 billion. Morgan Stanley, the perennial runner-up to Goldman in arranging mergers and acquisitions, has dropped to fourth this year, and the firm's market share in equity sales is at the lowest since 2002, according to data compiled by Bloomberg. At the same time, Morgan Stanley leapfrogged Deutsche Bank AG in the second quarter to become the world's No. 2 trader by revenue. Before Mack took over from former CEO Philip Purcell, three of the firm's top executives in institutional sales and trading, Vikram Pandit, John Havens, and Guru Ramakrishnan, quit to form their own hedge fund. M&A bankers Joseph Perella and Terry Meguid left to start a boutique investment bank, now called Perella Weinberg Partners LP and based in New York. Mack has room to pay his top producers. He cut Morgan Stanley's compensation and benefits costs to 39 percent of revenue in the fiscal third quarter from 46 percent a year earlier after eliminating about 2,000 of the firm's worst- performing brokers.
Source:  Bloomberg http://www.bloomberg.com