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







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


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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.