Bonuses, specifically whether to pay them or not, have been a huge issue as of late, one made more complicated by the fact that the top banks have all accepted (with no choice) TARP funds. Morgan Stanley seems to have struck an interesting balance that seems designed to be fair to executives, employees, shareholders and taxpayers. 

So let's discuss them one at a time.

Executives. None of the top three executives will get a bonus for 2008. That includes CEO John Mack, of course. To do anything else would have been politically foolish. While the firm will likely end the full year profitable, it came dangerously close to the brink, and the stock price tanked. (We'll get to the issue of taxpayer money below.) There was other news as well, starting next year, senior executives' bonuses will be linked to performance over 3 years and will be based on three criteria: The firm's ROE, relative ROE (vs. peers) and shareholder return. This seems reasonable enough; basing it on a longer-than-one-year time horizon will strike many as progress.

Employees. There's a lot of news here, and that there will be a bonus pool at all seems like an employee victory. Of course, the pool will be drastically reduced, given the environment and the 2008 performance of the firm. In an effort to better integrate performance with compensation, Morgan will offer three forms of bonus payments: Cash, equity that vests over 3 years and a deferred cash component that also vests over a three-year period and a clawback provision. The clawback will be invoked if the employee really screws the company, causing a restatement or PR damage. Hopefully, it will be invoked rarely, but it does send a certain message. There's a lot we don't know here, will individual bonuses be tied to individual performance, the performance of the operating unit, or the entire firm? My guess is some weighted average of all three, but it would be nice to know.

Taxpayers. There may be some critics who charge that the bank ought to be foregoing bonuses all together, given that it has accepted $10 billion in the first tranche of TARP funding. You could argue this many ways; you could say the firm was forced to accept the funds along with the other eight. But you could also argue that even if it had not been forced to accept initial funding it would have been forced to seek funds when the market started to really punish it. I've suggested that a profitable firm has a legitimate basis for paying bonuses. It can claim to be paying out of money set aside from earnings and not TARP funds; therefore, setting the "money is fungible" argument aside.

Shareholders. Well, these are extraordinary times. It may gall some suffering shareholders that bonuses are being paid when they have been treated so poorly. But what can really be done? If you bought near the top, you have no chance of recovering your investment any time soon, and that's what investing is all about. But the company would like to start thinking longer term, with its pay practices anyway. Perhaps that's the best, albeit not perfect, perspective. - Jim