Morgan Stanley CEO Says Pay-Cut Complaints Would Be ‘Naive’

By Michael J. Moore, Erik Schatzker and Patrick Clark - Jan 26, 2012 1:02 AM GMT+0700

Morgan Stanley (MS) Chairman and Chief Executive Officer James Gorman said employees understand why the investment bank had to cut pay, and those who don’t grasp the reasoning need to adjust their attitude.

“You’re naive, read the newspaper, No. 1,” Gorman said he would tell miffed employees, speaking in an interview on Bloomberg Television. “No. 2, if you put your compensation in a one-year context to define your overall level of happiness, you have a problem which is much bigger than the job. And No. 3, if you’re really unhappy, just leave. I mean, life’s too short.”

Morgan Stanley is reducing pay for senior investment bankers and traders by an average of 20 percent to 30 percent, people with knowledge of the decision said last week. The New York-based firm is also capping immediate cash bonuses at $125,000 as it defers a greater share of awards, a person briefed on the plan said.

“The world has changed and the banking industry has gone through a fundamental change, and we have to readjust,” Gorman said from Davos, Switzerland, where he’s attending the World Economic Forum’s annual meeting. “When we come out of this and we start re-performing, obviously compensation will reflect that. Until then, we have to respect the fact that shareholders have to get paid, too.”

Earnings Decline

Profit fell 13 percent last year to $4.11 billion as the firm had a 4 percent return on equity, below Gorman’s goal of the mid-teens. While Morgan Stanley posted the only trading- revenue increase among the major U.S. banks, excluding accounting gains, the firm had per-share losses in two of the past three quarters.

Goldman Sachs Group Inc. (GS) Chief Financial Officer David Viniar said last week that discretionary compensation declined “significantly more” than the firm’s 26 percent drop in revenue. Bank of America Corp. (BAC), the second-biggest U.S. lender by assets, told its investment bankers to expect compensation packages that average 25 percent less than last year, said two people with knowledge of the discussions.

Gorman’s own pay for 2011 fell 25 percent from a year earlier to $10.5 million, according to a person briefed on the figures.

Shareholders Matter

Gorman said his employees understand the need to reward shareholders with higher returns and he hasn’t seen signs of defections. The pay “is not as much as everyone would wish for, and it’s probably more than some of them expected in the world and turmoil that we’re in,” Gorman said. “They’re loyal. We’ve had very little turnover, no turnover of the top management committee at all.”

Morgan Stanley’s shares fell 44 percent in 2011, the biggest annual decline since 2008. The firm rose 5.4 percent on Jan. 19 after reporting a narrower fourth-quarter loss than analysts estimated, and had gained 20 percent this year through yesterday.

Gorman, 53, said the market gains this year have been a “relief rally” as Europe steadied and investors realized that the U.S. economy isn’t as bad as many feared. He said mergers and initial public offerings may pick up in the second half of this year.

Private investors reaching an agreement over a restructuring of Greek debt will keep Europe’s sovereign debt crisis from getting worse and could spur more efforts from the European Central Bank, he said.

Moving Forward

“Getting Greece done is something concrete that puts a line in the sand,” Gorman said. “That will be a major push towards more action by the ECB and I believe the euro staying together as we move forward.”

Charles Dallara, managing director of the Washington-based Institute of International Finance, will return to Athens tomorrow to resume talks with the Greek government on a voluntary bond swap, Greek government spokesman Pantelis Kapsis said today. Kapsis told reporters in Athens he hoped talks on the debt swap are concluded by the end of the week.

“If Greece fails, then it raises questions about much larger economies,” Gorman said. The situation has steadied as administrations have been changed in Spain, Italy and Greece, central bankers have taken action and banks are starting to raise capital, deleverage and “get their balance sheets in shape,” Gorman said. “We’ve got a lot of momentum. What we need to do is close off some of these problems.”

To contact the reporters on this story: Michael J. Moore in New York at mmoore55@bloomberg.net; Erik Schatzker in New York at eschatzker@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net