Morgan Stanley has set aside an unprecedented 72 per cent of its revenues from the past three months to pay bonuses for staff, warning that a costly "war for talent" on Wall Street was unsustainable.
The investment bank, which came to the brink of collapse last year, decided to insulate its employees from the effects of sliding revenues, on which pay is normally based, even though the issue of bankers' bonuses continues to generate public fury and political consternation.
Executives signalled that they fear losing important members of staff to Goldman Sachs and other rivals, which could make it harder for the company to claw its way back to profitability.
"The war for talent seems to be as hot as ever. I'm not sure that's sustainable," Colm Kelleher, Morgan Stanley's chief financial officer, said in an interview with Bloomberg. Compensation expenses were $3.9bn in the three months to 30 June, compared to $3.1bn in the same period last year, despite the fact that net revenues dropped to $5.4bn from $6.1bn.
The number of Morgan Stanley employees rose to 62,215, which included 20,004 people from the company's new Morgan Stanley Smith Barney retail brokerage joint venture with Citigroup.
Mr Kelleher also told analysts that it has raised the salaries of mid-level staff called managing director from $300,000 to $400,000, in common with some other banks who are trying to make bonuses a less important part of overall pay. Many on Wall Street concede that a desire to maximise annual bonuses may have led staff to take excessive risks, contributing to the credit crisis.
Goldman Sachs set aside $6.6bn to pay its staff for the second quarter, triggering a new round of political condemnation of Wall Street bonuses, including from President Barack Obama. "You don't get a sense that folks on Wall Street feel any remorse for taking all these risks," he said. "You don't get a sense that there's been a change of culture and behaviour as a consequence of what has happened."
However, most investment banks have again been making large profits since the start of this year, and have been poaching staff in the hope of gaining an edge over rivals. For example, Merrill Lynch, which saw an exodus of bankers after it was taken over by Bank of America at the height of last autumn's financial panic, has this year hired more than 100 new bankers, including some senior executives to whom it has offered guaranteed bonuses.
Morgan Stanley's results yesterday disappointed investors, who had hoped it would follow in the footsteps of Goldman Sachs and other rivals by reporting better-than-forecast numbers. The headline loss for the quarter was $159m, but Mr Kelleher said the figures were complicated by one-off accounting charges. These included a $2.3bn revenue hit related to the notional cost of buying back its debt, and the accelerated amortisation of $850m related to the $10bn in bailout money that the company repaid to the taxpayer last month.Reuse content