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How Morgan Stanley’s Mack Earned Another Payout

Friday, April 9, 2010 - 11:09
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Here’s another consequence of recent Wall Street pay trends: Some company I.O.U.’s to their top executives are ballooning.

Consider Morgan Stanley, where the deferred-compensation accounts of its chairman, John J. Mack, jumped in value to $43.3 million from $27.2 million at the end of 2008 — and that’s during a year when neither he nor the company set aside any new pay for him under the company’s deferral programs.

The gains come from several current and grandfathered arrangements, some dating to the 1980s, and one still paying Mr. Mack guaranteed interest payments of 11 percent to 12 percent a year, which worked out to $2150,120 in 2009. But most of the increase in Mr. Mack’s accounts — about $15.7 million — comes from gains in the value of his restricted stock units, or R.S.U.’s, and dividendlike payments on them.

This is even though he hasn’t received new restricted stock units in years, and Morgan Stanley last year paid him no bonus at all.

Even though it came in 2009, none of that $15.7 million gain shows up in the proxy table laying out Mr. Mack’s annual compensation for last year. That’s because rules from the Securities and Exchange Commission direct companies to disclose only “above-market” returns on deferred compensation in the table. Market returns, such as from gains in Morgan Stanley’s stock price, are left out.

Still, Morgan Stanley is on the hook for the increase in Mr. Mack’s deferred-comp accounts.

Despite being called stock units, those R.S.U.’s aren’t actually shares of Morgan Stanley stock. They amount to a bookkeeping entry, tracking what the company owes the executive for past work: the account value rises or falls based on the fortunes of Morgan Stanley’s shares and dividends. But the company can ultimately decide to pay the R.S.U.’s out in cash instead of stock, and Morgan Stanley filings make abundantly clear that in the event of bankruptcy, those restricted stock units are simply unsecured I.O.U.’s.

The proxy notes that executives getting restricted shares from the company “will have only the rights of a general unsecured creditor of the Company. A Participant will not be a shareholder with respect to the shares underlying stock units unless and until the stock units convert to shares of common stock.”

Along with other big financial firms that received federal bailout funds over the last 18 months, Morgan Stanley is under pressure to pay executives less cash and more stocklike instruments and to put more of that pay “at risk” over time. Last year, the company reported to shareholders that about three-quarters of top executives’ pay was deferred, up from 42 percent in 2008.

Today’s pay-disclosure rules were drafted, for the most part, with stock options in mind, and the rules for deferred equity can be confusing, says Mark Borges, a principal at Compensia, a pay-consulting firm, and a former S.E.C. special counsel. (Until this year, Morgan Stanley didn’t disclose R.S.U.’s as deferred pay at all.) Regulators “may need to do a more thorough review of how these rules work,” he said.

Mr. Mack isn’t the only Morgan Stanley executive to see gains on R.S.U.’s last year. Together, he and the company’s four highest-paid executives are owed about $96.3 million by Morgan Stanley for back pay as of Dec. 31, up from about $48.8 million at the end of 2008.

– Theo Francis

Theo Francis, who writes for the Web site, is keeping an eye on corporate perks disclosed in regulatory filings this proxy season for DealBook’s Perks Watch.