Morgan Stanley Sets Aside 72% of Revenue for Employees’ Pay

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Christine Harper
July 22, 2009 - Bloomberg

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Morgan Stanley set aside 72 percent of its second-quarter revenue for compensation and benefits, more than Goldman Sachs Group Inc. or JPMorgan Chase & Co., amid a "war for talent" with rivals that generate more money.

"It was a very good quarter to be a Morgan Stanley employee," said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. "I'm not so sure it was so good to be a Morgan Stanley shareholder."

The average ratio of compensation to revenue at securities firms this decade has been about 48 percent, Hintz said, calling Morgan Stanley's figure "pretty extraordinary." Chief Executive Officer John Mack, 64, is under pressure to increase pay after Goldman Sachs set aside a record $11.4 billion for salaries, benefits and bonuses in the first half and JPMorgan Chase & Co. boosted investment-bank compensation by 37 percent.

First-half compensation expenses at Morgan Stanley, the biggest U.S. brokerage, dropped 14 percent to $5.91 billion as revenue plunged 40 percent. (See table, below.) The firm reported a second-quarter loss from continuing operations of $159 million that was bigger than analysts estimated. Goldman Sachs last week posted record earnings of $3.44 billion.

"The war for talent seems to be as hot as ever, I'm not sure that's sustainable," Colm Kelleher, Morgan Stanley's chief financial officer, said in an interview today.

The number of employees rose to 62,215 at the end of June, which included 20,004 people from the company's new Morgan Stanley Smith Barney retail brokerage joint venture with Citigroup Inc.

Repaying TARP

Morgan Stanley last month repaid $10 billion to the U.S. government plus dividends to shake off restrictions on the size of bonuses it can award.

"If it's seen that Goldman's the place where you're going to get compensated, that's obviously going to lead to some type of a talent drain at some point," said Ben Wallace, an analyst at Grimes & Co. in Westborough, Massachusetts, which manages $750 million in assets. "Morgan Stanley's big challenge, whether it's compensation or risk or earnings outlooks, is going to be differentiating themselves from Goldman Sachs."

Last year Morgan Stanley slashed compensation costs by 26 percent, including a 50 percent average reduction in bonuses for all employees except for financial advisers, as the firm's revenue tumbled 12 percent. The firm also changed pay practices so it can recoup a portion of employees' cash bonuses if problems arise in subsequent years.

This year, as competition for workers increased, Morgan Stanley raised base salaries for top executives to make up for a decline in bonuses.

Six Months

In the second quarter, Morgan Stanley's compensation expense of $3.88 billion was 72 percent of the quarter's $5.41 billion of revenue. For the first six months of the year, the firm's $5.91 billion expense was 71 percent of the $8.36 billion of revenue.

Goldman Sachs's first-half expenses for pay were up 33 percent from a year earlier and was enough to give each worker at Goldman Sachs $386,429 for the period. Goldman set aside 49 percent of revenue in the first six months of the year for salaries, benefits and bonuses.

JPMorgan Chase & Co. set aside $6.01 billion in the first half for investment bank employees' compensation, up 37 percent from a year earlier, even as the number of people employed at the investment bank fell 30 percent. The division's compensation makes up 38 percent of the revenue it generated in the six-month period, down from 51 percent in the same period a year earlier.

Investment banks have traditionally awarded a large portion of employees' compensation in the form of year-end bonuses tied to the performance of the firm and the individual. The more senior an employee, the bigger percentage of their pay typically comes in the form of the year-end bonus. Payments are often made in restricted stock that can't be cashed out for several years.

The following table compares revenue, compensation and employee numbers at Morgan Stanley, Goldman Sachs and JPMorgan Chase's investment bank in the first half:

First-Half Revenue, Compensation and Head Count:

               Revenue       Comp       Employees Comp/Employee

Morgan Stanley $8.36 bln     $5.91 bln  62,215*   $95,009

Goldman Sachs  $23.2 bln     $11.4 bln  29,400    $386,429

JPMorgan
Investment
Bank           $15,672 bln   $6.01 bln  25,783    $232,983

*Includes 20,004 employees related to the Morgan Stanley Smith
Barney joint venture with Citigroup Inc.

Source: Company reports.