Morgan Stanley (MS) showcased its strengthening financial ability by bringing the employees’ incentive compensation policy closer to the entire industry’s long-term policy for the same. The company filed with the U.S. Securities and Exchange Commission (SEC) and revealed its intention to pay more cash bonuses to employees from now on.
Previous Pay Strategy
The financial crisis of 2008, which had shaken the entire banking industry, took its toll on Morgan Stanley as well. The company’s consistent efforts and focus helped it in surviving the crisis and further in recovering its financials. In an effort to rebound by reducing costs, the company withheld more pay. Last year, the company had deferred around 80% of cash bonuses.
Moreover, in 2012, the company even deferred 100% bonuses of several senior bankers. This strategy compelled employees to stay with the company for a longer period. However, the investment banker was criticized for this forceful retention of employees and for putting strain on future profitability through accumulation of costs.
Updated Bonus Strategy
Though Morgan Stanley benefited from its ‘more deferral’ policy at the time of the economic meltdown, this step created a huge burden in the form of elevated future costs. The company now looks forward to reducing its average rate of deferrals to 50% this year.
Moreover, the compensation committee of the company’s board consented to hand out the previous outstanding cash bonuses as of Dec 1, 2014. The company will bear a $1.2 billion charge in the fourth-quarter of 2014 triggered by such hastened vesting of pending compensations.
Implications
This move by Morgan Stanley will have an accounting impact since the company will now recognize compensation expenses instantly rather than over the years. Moreover, the extra charge that the company will have to incur in the fourth-quarter will heighten expenses. However, a previously declared $1.3 billion tax benefit to be recognized in the fourth-quarter will cover the additional expense.
Further, this initiative will be appreciated by the regulators as deferrals boost profits in the short term but may cause long-term damage. Also, withholding compensations hurts the company’s chances of hiring new staff. Moreover, confidence of shareholders regarding the company’s future performance will be enhanced as the burden of accruing costs will be lifted off to some extent.
Currently, Morgan Stanley carries a Zacks Rank #3 (Hold). Some better-ranked investment bankers include Piper Jaffray Companies (PJC), The Goldman Sachs Group, Inc. (GS) and Evercore Partners Inc. (EVR). While Piper Jaffray carries a Zacks Rank #1 (Strong Buy), Goldman Sachs and Evercore Partners hold a Zacks Rank #2 (Buy).
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