Bonus Season Afoot, Wall Street Tries for a Little Restraint

The New York Times - Louise Story
December 9, 2008

With Wall Street pay under scrutiny as never before, Morgan Stanley is attaching a string to its annual bonuses — one that would enable the bank to yank some money back from its employees.

The move, announced on Monday, is the most drastic step yet by a major Wall Street bank to quell criticism that bankers and traders had crippled their firms by taking outsize risks to reap outsize pay.

Under the plan, Morgan Stanley will withhold a portion of its employees’ bonuses for three years. If a worker’s bets on the markets go wrong during that time, some of the bonus will not be paid. The so- called claw-back provision is intended to discourage employees from making short-sighted decisions by tying their compensation to the bank’s long-term performance.

It was unclear whether other banks would follow suit. But with pay under a microscope and the annual bonus season now at hand, Wall Street is moving to deflect criticism over paying bonuses after many banks, including Morgan Stanley, accepted billions of dollars from the government.

The announcement came on a day when another Wall Street giant, Merrill Lynch, also announced that its senior executives would forgo bonuses this year. Several other major firms have announced similar moves as the public outcry over pay has escalated.

Morgan Stanley’s three top executives — John J. Mack, the chief executive, and the co-presidents, James P. Gorman and Walid A. Chammah  — will not be paid bonuses, the firm said. Bonuses for the bank’s 14- person operating committee will be cut by 75 percent.

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Morgan Stanley and other banks have come under criticism for paying out record bonuses in recent years based on profits that turned out to be illusory. Much of the money that Wall Street earned during the bull market has vanished in the flames of the financial crisis. Goldman Sachs, which also received government money, said several weeks ago that its top seven employees would not receive bonuses this year.

The idea that Wall Street executives might collect any bonuses, let alone large ones, has angered many policy makers and ordinary Americans. Wall Street’s sensitivity to the subject was evident on Monday at the headquarters of Merrill Lynch, the once-proud brokerage firm that is now being sold to Bank of America.

Merrill’s chief executive, John A. Thain, had requested a $10 million bonus this year, but the firm’s compensation committee balked at awarding him any payout, according to someone familiar with the situation but not authorized to discuss it.

Mr. Thain inherited a mess at Merrill when he became chief executive a year ago, and some argue that he prevented the firm from collapsing, as did Lehman Brothers, by selling it to Bank of America in September.

Even so, some officials viewed his request for a bonus as ill-timed given the continuing troubles at his firm and the industry at large.

”Paying executives at Merrill millions each in ‘performance’ bonuses in this context would be oxymoronic to say the least and certainly a thumb in the eye to taxpayers,” Andrew M. Cuomo, the attorney general of New York, wrote in a letter to Merrill’s board on Monday after The Wall Street Journal ran an article about Mr. Thain’s bonus wishes.

While meeting with Merrill’s compensation committee and full board on Monday, Mr. Thain requested that he not receive a bonus. The committee discussed paying him one, possibly in stock rather than cash, but decided that would still outrage the public, according to the person familiar with the conversations.

Merrill Lynch released a statement saying that Mr. Thain requested no bonus, as did four other senior executives at the company.

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The bank’s actions could open it to lawsuits, however, employment lawyers said.

”We’re in uncharted waters whether this is lawful,” said Gary E. Phelan, a lawyer with Outten & Golden.