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Morgan Stanley to pay smaller proportion of revenue in bonuses

Morgan Stanley headquarters in New York City.
Victor J. Blue | Bloomberg | Getty Images
Morgan Stanley headquarters in New York City.

Wall Street powerhouse Morgan Stanley said it would pay a smaller portion of revenue in bonuses to investment bankers and traders this year even in a better revenue environment.

The bank reported a drop in fourth-quarter adjusted earnings on Tuesday as it cleared the decks for a more disciplined approach to compensation by deferring fewer bonus payouts.

In the past, the bank has deferred up to 80 percent of its bonuses at times of market uncertainty.

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The bank said in December it would pay more bonuses upfront because it was on a stronger financial footing and in a better position to make its practices more in line with those of rivals.

Morgan Stanley said it would pay 39 percent or less of revenue from its institutional securities business to employees in 2015. Chief Executive James Gorman said in June the ratio would be 40 percent or less.

The bank's adjusted earnings fell short of estimates, mainly due to the jump in bonus payments and unexpected market swings that hit its division that trades bonds, currencies and commodities.

The bank's shares fell 1.5 percent in early trading. (Get the latest quote here.)

Compensation expenses rose to $5.1 billion from $4.0 billion, with about 41 percent of revenue from the bank's institutional securities business going into bonuses.

While not strictly comparable, arch rival Goldman Sachs paid out 36.8 percent.

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Gorman said he was not concerned about losing talent.

"We get a very attractive employee base coming to this firm and frankly it's just not an issue," he said on a call.

Choppy markets caused by factors ranging from plunging oil prices to political upheaval in Greece, sent investors scurrying last month, slashing the trading revenue of U.S. banks.

Morgan Stanley had a "very challenging" quarter in commodities because of the decline in oil prices, Chief Financial Officer Ruth Porat told Reuters.

Excluding a range of special items, revenue from trading fixed-income securities, currencies and commodities (FICC) fell 13.7 percent to $599 million.

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Morgan Stanley has been shrinking its presence in the bond market as tougher capital requirements take hold, and the bank has said it is now more focused on returns than revenue. But its adjusted average return-on-equity fell to 4.5 percent in the quarter, below both the 10 percent minimum Gorman wants.

Revenue from the bank's increasingly important wealth management business rose 2.4 percent to $3.80 billion. But the pretax profit margin of 19 percent including adjustments was below the 20 percent Gorman has set as a minimum.

Advisory revenue increased 8.2 percent to $488 million, while legal expenses fell to $284 million from $1.4 billion.

Overall, earnings attributable to common shareholders rose to $920 million, or 47 cents per share, from $36 million, or 2 cents per share, a year earlier.

Adjusted earnings of 39 cents per share, as calculated by Thomson Reuters I/B/E/S, missed the average analyst estimate of 48 cents.