Morgan Stanley Chief Warns on Wall Street Pay

Morgan Stanley is preparing to wield its axe again, with more job cuts and smaller bonuses planned for next year as the investment bank attempts to boost shareholder returns.

Morgan Stanley
Oliver P. Quillia for
Morgan Stanley

In the latest sign of the pressure Wall Street is under to cut costs and address high pay levels, James Gorman, chief executive, said that staff and remuneration would have to be sacrificed as banks cope with lower profits.

“There’s way too much capacity and compensation is way too high,” Mr. Gorman said in an interview with the Financial Times. “As a shareholder I’m sort of sympathetic to the shareholder view that the industry is still overpaid.”

In common with other large investment banks, Morgan Stanleyis responding to pressures caused by new regulation, lower trading volumes, and increased competition from non-bank financial companies such as hedge funds and private-equity firms.

Deutsche Bank plans to lose at least 1,900 bankers, whileCitigroup has said it is shedding an extra 350 employees, mostly traders.Credit Suisse and UBS are both pressing ahead with job cuts announced late last year.

Morgan Stanley itself is already axing 4,000 jobs, 7 percent of its workforce, by the end of this year. In the new year, Mr. Gorman said, the bank will consider its next round of cost-cutting, including lower pay and bonuses.

“Comp [compensation] comes down because the amount of people in the business comes down,” said Mr. Gorman. “What the Street has historically done is when revenues went up, they kept the comp-to-revenue ratio flat. They rank comp by ratio. When revenues went down, they increased the comp-to-revenue ratio because they said, ‘We might lose all our people. We have to increase it.’ ”

He added: “That’s a classic Wall Street case of ‘Heads I win; tails, you lose.’ The current Wall Street management is a little tougher-minded about that and shareholders are certainly tougher-minded.”

Even with the additional cost-cutting, Morgan Stanley is targeting a much more modest return on equity than pre-crisis levels of as much as 23 percent.

“We’re generating 5 percent, can we get back to 10 percent? That’s much more interesting to me than can we get back to 15 percent or will we ever get back to the glory days — those are completely flawed anyway,” said Mr. Gorman.

The chief executive is attempting a dramatic transformation of his company by weaning it off volatile trading income in favor of more stable revenues from retail brokerage and wealth management, where it invests on behalf of well-off clients.

News of further pay cuts, including potentially for new entrants at the investment bank, comes just weeks after Goldman Sachs confirmed it was overhauling its well-known entry-level program for analysts. Goldman was said to have tired of the number of analysts in the program who left the bank for hedge funds. (Read More: Goldman Kills 2-Year Contracts for New Investment Bankers.)

Mr. Gorman said that Morgan Stanley will probably keep its own analyst program, but pay could be reduced significantly.