Is Morgan Stanley's CEO Worth It?

CEO compensation is a hot topic, especially now that the Dodd-Frank Act requires say-on-pay votes. With CEO pay and performance seemingly disconnected at the following company, the Fool invites you to judge for yourself whether this business's boss actually deserves such a hefty paycheck.

Controversies over executive compensation aren't going away anytime soon. It's hard to understand why any CEO needs to rake in millions of dollars per year, much less tens of millions. James Gorman, CEO of Morgan Stanley (NYSE: MS  ) , runs a $36 billion financial services giant -- which sounds a lot less impressive when you realize that Morgan had a market cap of $70 billion just four years ago.

The pay
According to The Wall Street Journal, Gorman's total direct compensation for 2010 was $14 million, including nearly $2 million in "performance" awards. That might be OK if Morgan's stock price was on the rise, but the company's shares have shed more than 8% annually over the past two years, on average, and more than 12% over the past five.

To be fair, Gorman has been the top dog for less than a year and a half, but for several years before that, he was co-president of the company and co-head of strategic planning. Clearly, his hand has been on the company's rudder for quite a while.

Some might contend that compared to his peers, Gorman's pay isn't so lavish. It's true that, per the Journal, JPMorgan Chase's (NYSE: JPM  ) Jamie Dimon collected $23 million in 2010, American Express' Kenneth Chenault collected more than $20 million, and US Bancorp's (NYSE: USB  ) Richard Davis raked in $16 million.

However, comparing pay to peers is what CEOs do when bucking for big bucks from their boards of directors. Instead, those boards should think about whether their pay structures reflect actual performance, not peer pay levels. In this respect, the folks at Governance Metrics International, which reviews and rates hundreds of CEO pay packages, have flagged Morgan Stanley as a "high concern" company. Let's check out Morgan's recent performance, and see what Governance Metrics is so worried about.

Morgan Stanley, 2006-2010

Metric

2010

2009

2008

2007

2006

Stock performance (7%) 87% (68%) (20%) 45%
Revenue $31.6 billion $23.4 billion $24.7 billion $28.0 billion $34.6 billion
EPS $2.63 ($0.77) $1.45 $2.98 $7.07

Data: Morningstar.com.

In addition, the $1.08 in annual dividends that the company paid out in 2006 has fallen to $0.20 annually for the past two years.

Sure, the chart above contains several promising numbers, suggesting that the company does seem to be getting its act together. But not all revenue and earnings dollars are equal. Some of the increases in major banks' recent profits owe to their lending less, and thereby expecting fewer bad-loan losses.

The problems
Morgan Stanley's wealth management division has been growing, but it's also been losing advisors to competitors. The company may be pleasing its private investors at the expense of its investment banking customers. Morgan Stanley was one of the underwriters for LinkedIn's (NYSE: LNKD  ) IPO, which priced shares at $45. Morgan's favored investors got to snap up those shares earlier than most of the rest of the market, and scored immediate huge gains when LinkedIn began trading at $83.

However, while its investors cashed in, LinkedIn itself got none of those gains. Clearly, it could have sold those shares at a higher price and kept a lot more capital for itself. Now, other companies that might have wanted Morgan to underwrite their debuts could start looking elsewhere.

Morgan Stanley and peers such as Citigroup (NYSE: C  ) are also getting increased scrutiny for activities such as the now-common special meetings they hold for their large hedge fund clients. By law, they're not permitted to divulge nonpublic information in those meetings, but some critics wonder what exactly the investment banks are doing behind closed doors. Goldman Sachs stopped holding such meetings and Bank of America's (NYSE: BAC  ) Merrill Lynch division has cut back on them.

And more than two years after the financial crisis, Morgan Stanley's still getting its finances back in order. Morgan just settled a lawsuit with US Bancorp over a collateralized debt obligation (CDO), with other related lawsuits, and hundreds of millions of dollars in possible losses, still pending. Right now, Morgan hardly seems successful or thriving -- but you'd never know that from the rewards that its CEO is raking in.

What now?
It's too late to vote against Gorman's lavish executive pay in Morgan Stanley's proxy materials this year. However, you can still contact the company's investor relations department to voice your displeasure at its compensation policies.

Longtime Fool contributor Selena Maranjian owns shares of American Express, and JPMorgan Chase. The Motley Fool owns shares of JPMorgan Chase and Bank of America and has also shorted Bank of America. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.


Read/Post Comments (3) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 27, 2011, at 1:21 PM, KL1114 wrote:

    vasy majority of CEOs are not worth it.. it's mostly a network of guys running companies and sitting on each other's boards... and awarding excessive compensation to themselves..mostly in the form of stock.. I'm no union guy but if we took ther long view of compensation, it is better spent at bottom to middle than on top..that is where you get the perfomance and production you need to make a business successful..

  • Report this Comment On May 28, 2011, at 11:21 AM, jmvjjr wrote:

    He dealt a painful blow to the folks in the trenches this year and it doesn's look like he felt the hurt I did.

  • Report this Comment On May 31, 2011, at 12:01 AM, susan400 wrote:

    Listen, finance is more complex than CEO compenstion vs stk preformamce.

    cos take risks, run bisinesses.

    only those who don't know the field would bother.

    what matters is 5 yr an 165 yr earnings

Add your comment.

DocumentId: 1500481, ~/Articles/ArticleHandler.aspx, 4/16/2014 12:53:39 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement