Bank compensation has been a frequent target of public ire in the wake of the financial bailout, but tinkering with the system is unlikely to help avert another economic crisis or make more than a marginal difference for shareholders.
recently increased base pay for many of its top executives, in response to the scrutiny of the public and elected officials. The firm last fall received $10 billion from the federal government, which recently ordered the company to raise $1.8 billion to withstand possible worsened economic conditions studied under recent stress tests.
People are right to get riled up about compensation. Wall Street executives get paid vast amounts of money for work that appears to provide little if any benefit to society. In many cases, the companies they work for provide few benefits to shareholders.
But there is no significant difference between the pay practices of institutions that have most severely battered during the financial crisis, such as
, and ones that have been comparative stars, such as
, according to Alan Johnson, managing director of Johnson Associates, and one of Wall Street's leading compensation consultants.
"The popular mythology that every night people loaded up these big bags of money and took them out to the limo and were chauffeured home, that isn't the truth," Johnson says, noting that many senior executives at places like Lehman and Bear had the bulk of their net worth tied up in the shares of the companies they worked for.
That said, Johnson applauds Morgan Stanley's increased emphasis on base pay as opposed to year-end bonus in compensating executives, not least because he believes it saves companies money.
"We tell our clients often that if your base salary is a dollar below the market, you probably have to make it up with two dollars of uncertain bonus," says Johnson, who did not advise Morgan on the move.
Richard Bove, an analyst at Rochdale Securities, believes Morgan Stanley and other banks are increasing base pay to get around new government restrictions on bonuses.
A source with direct knowledge of Morgan Stanley's compensation structure says this change is a relative drop in the bucket, as banks in which the government has a preferred equity stake are still severely limited in how much they can pay top executives.
For example, Morgan Stanley's managing directors, which number in the hundreds, now typically have a base salary of no more than $400,000. Their bonus, paid in stock, cannot be worth more than a third of this total, under an amendment to the $789 billion stimulus package passed by Congress in February.
One factor in Morgan Stanley's decision to increase base pay was to make it competitive with Goldman Sachs, which pays a base salary of about $600,000 to its senior managing directors -- a title roughly equivalent to managing director at Morgan Stanley, according to the person familiar with Morgan Stanley's compensation structure.
Spokesmen for Morgan Stanley and Goldman declined to comment.
Even if it is difficult to prove that bank compensation practices played an important role in bringing about the current crisis, the tinkering by banks and lawmakers is likely to continue.
Wednesday, business professors at Wharton School of the University of Pennsylvania and NYU Stern proposed a new structure, involving the creation of an escrowed "incentive account" in cash and stock which pays out gradually over time and is periodically rebalanced.
Johnson remains skeptical, however, that any compensation plan can fully shield an institution from the risks inherent in the financial system.
"Most of the disasters in financial services of the last 20 or 25 years nobody saw coming," he says. "So it isn't that you knew the ice was thin. No, you thought that the ice was 20 feet thick."