UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
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MORGAN STANLEY
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
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þ | No fee required. |
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April 5, 2012March 28, 2013
Fellow shareholder:
I cordially invite you to attend Morgan Stanley’s 20122013 annual meeting of shareholders that will be held on Tuesday, May 15, 201214, 2013, at our offices at 2000 Westchester Avenue, Purchase, New York. I hope that you will be able to attend.
At the annual meeting of shareholders, we will consider the items of business discussed in our proxy statement and review significant strategic developments and other developments in the lastCompany’s overall progress over the past year.Your vote is very important. Whether or not you plan to attend the meeting, please votesubmit a proxy promptly to ensure that your shares are represented.represented and voted at the annual meeting.
Thank you for your support of Morgan Stanley.
Very truly yours,
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James P. Gorman |
Chairman and Chief Executive Officer |
1585 Broadway
New York, NY 10036
Notice of 20122013 Annual Meeting of Shareholders
We are mailing this proxy statement and the accompanying proxy card to shareholders on or about April 6, 2012 in connection with the solicitation of proxies by our Board of Directors for the 2012 annual meeting of shareholders.
In this proxy statement, we refer to Morgan Stanley as the “Company,” “we,” “our” or “us” and the Board of Directors as the “Board.”
About Our Annual Meeting
Time and Date | 9:00 a.m. | |
Location | Morgan Stanley 2000 Westchester Avenue, Purchase, New York | |
Items of Business | • Elect the Board of Directors
• Ratify the appointment of Deloitte & Touche LLP as independent auditor
• Approve the
• Approve the amendment of the 2007 Equity Incentive Compensation Plan to increase shares available for grant • Approve the amendment of the 2007 Equity Incentive Compensation Plan to provide for qualifying performance-based long-term incentive awards under Section 162(m) • Approve the amendment of the Section 162(m) performance formula governing annual incentive compensation for certain officers
• Transact such other business as may properly come before the meeting or any postponement or adjournment thereof | |
Record Date | The close of business on March | |
Admission | Only record or beneficial owners of Morgan Stanley’s common stock as of the record date, the close of business on March 18, 2013, or | |
Webcast | If you are unable to attend the meeting in person, you may listen to the meeting atwww.morganstanley.com/about/ir/ | |
Voting | It is important that | |
Notice | We are |
Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to Be Held on May 15, 2012:14, 2013: Our Proxy Statement and our Annual Report on Form 10-K for the year ended December 31, 20112012 are available free of charge on our website at www.morganstanley.com/2012ams.2013ams.
By Order of the Board of Directors, |
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Martin M. Cohen |
Corporate Secretary |
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Annex A: Morgan Stanley 2007 Equity Incentive Compensation Plan (As Proposed to | A-1 | |||
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Morgan Stanley
1585 Broadway
New York, New York 10036
April 5, 2012March 28, 2013
Proxy Statement
We are sending youproviding shareholders this proxy statement in connection with the solicitation of proxies by our Board of Directors for the 20122013 annual meeting of shareholders. We are mailing this proxy statement and the accompanying form of proxy to shareholders on or about April 6, 2012. In this proxy statement, we refer to Morgan Stanley as the “Company,” “we,” “our” or “us” and the Board of Directors as the “Board.” When we refer to 2009, 2010, or 2011, we mean the twelve-month period ending December 31 of the stated year.
OUR BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE ELECTION OF ALL DIRECTOR NOMINEES.
Director Selection and Nomination Process
Our Board currently has 1314 directors. The Nominating and Governance Committee’s charter provides that the committee will actively seek and identify nominees for recommendation to the Board consistent with the criteria in the Morgan Stanley Corporate Governance Policies (Corporate Governance Policies), which provide that the Board values members who:
Combine a broad spectrum of experience and expertise with a reputation for integrity;
Have experience in positions with a high degree of responsibility;
Are leaders in the companies or institutions with which they are affiliated;
Can make contributions to the Board and management; and
Represent the interests of shareholders.
While the Board has not adopted a policy regarding diversity, the Morgan Stanley Corporate Governance Policies (Corporate Governance Policies) provide that the Board will take into account diversity of a director candidate’s perspectives, background and other relevant demographics. The Nominating and Governance Committee and Board may also determine specific skills and experience they are seeking in director candidates based on the needs of the Company at a specific time. In considering candidates for the Board, the Nominating and Governance Committee considers the entirety of each candidate’s credentials in the context of these criteria.
The Nominating and Governance Committee may consider, and the Board has adopted a policy regarding, director candidates proposed by shareholders (see “Corporate Governance Policies”). The Nominating and Governance Committee may also retain and terminate, in its sole discretion, a third party to assist in identifying director candidates or in gathering information regarding a director candidate’s background and experience. Members of the Nominating and Governance Committee, the Lead Director and other members of the Board interview potential director candidates as part of the selection process when evaluating new director candidates.
Pursuant to the terms of the Investor Agreement between Morgan Stanley and Mitsubishi UFJ Financial Group, Inc. (MUFG) dated October 13, 2008, as amended and restated as of June 30, 2011 (Investor Agreement), Morgan Stanley agreed to take all lawful action to cause two of MUFG’s senior officers or directors to become members of Morgan Stanley’s Board. In March 2011, MUFG designated Mr.Messrs. Masaaki Tanaka and Ryosuke Tamakoshi as aits representative directordirectors under the Investor Agreement, and Mr. Tanakaeach was elected by shareholders at the 20112012 annual meeting of shareholders. MUFG designated Mr. Ryosuke Tamakoshi as its second representative director under the Investor Agreement, and Mr. Tamakoshi was elected by the Board on July 20, 2011.
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Director Experience, Qualifications, Attributes and Skills
When the Board nominates directors for election at an annual meeting, it evaluates the experience, qualifications, attributes and skills that an individual director candidate contributes to the Board as a whole to assist the Board in discharging its duties. As part of the ongoing process to evaluate these attributes, the Board performs an annual self-evaluation and has adopted athe Board-approved Corporate Governance Policy that providesPolicies provide that the Board expects a director whose principal occupation or employer changes, or who experiences other changed circumstances that could diminish his or her effectiveness as a director or otherwise be detrimental to the Company, to advise and to offer to tender his or her resignation for consideration by the Board.
The Company believes that an effective board consists of a diverse group of individuals who bring a variety of complementary skills. The Nominating and Governance Committee and Board consider these skills in the broader context of the Board’s overall composition, with a view toward constituting a board that has the best skill set and experience to oversee the Company’s business. Our directors have a combined wealth of leadership experience derived from extensive service guiding large, complex organizations as executive leaders or board members and in government and academia and possess substantive knowledge and skills applicable to our business, including experience in the following areas:
Business Development Compensation Corporate Governance Finance | Financial Services International Matters Management Development and Succession Operations Public Accounting and Financial Reporting
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Technology |
The Nominating and Governance Committee regularly reviews the composition of the Board in light of the Company’s evolving business requirements and its assessment of the Board’s performance to ensure that the Board has the appropriate mix of skills needed for the broad set of challenges that it confronts.
The Board stands for election at each annual meeting of shareholders. Each director holds office until his or her successor has been duly elected and qualified or the director’s earlier resignation, death or removal.
The Corporate Governance Policies provide that a director should not be nominated for election if the candidate would be 72 at the time of the election. Roy J. Bostock is not standing for re-election at the 2013 annual meeting of shareholders, in accordance with the Corporate Governance Policies. The Board thanks Mr. Bostock for his dedicated service to Morgan Stanley.
The Board has nominated the 1314 director nominees below for election at the 20122013 annual meeting of shareholders in accordance with the Corporate Governance Policies. Each nominee has indicated that he or she will serve if elected. We do not anticipate that any nominee will be unable or unwilling to stand for election, but if that happens, your proxy will be voted for another person nominated by the Board. On March 30, 2012, James H. Hance, Jr. notified the Company that he will not stand for re-election at the annual meeting of shareholders.
The Nominating and Governance Committee’s third-party search firm and members of the Board recommended each of Mr. Klaus KleinfeldRobert H. Herz and Mr. Thomas H. Glocer as a potential director candidatecandidates to the Nominating and Governance Committee. The Board unanimously elected Mr. Herz as a director, effective July 2, 2012, and has nominated Mr. KleinfeldGlocer for election at the annual meeting of shareholders.
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Director Since 2005 | Professional Experience: • Mr.
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• He served as Co-Chair of the National Commission on Fiscal Responsibility and Reform • Mr. Bowles • • Mr. Bowles served as White House Chief of Staff from 1996 to 1998 and Deputy White House Chief of Staff from 1994 to 1995. He was head of the Small Business Administration from 1993 to 1994 and served as United Nations Under Secretary General, Deputy Special Envoy for Tsunami Recovery in 2005.
Other Current Directorships: Belk, Inc., | |
Other Directorships in the Past Five Years: Cousins Properties Incorporated and General Motors Corporation
Qualifications, Attributes and |
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Howard J. Davies Director Since 2004 | Professional Experience: • Mr. Davies has served as the non-executive Chairman of Phoenix Group Holdings since October 2012 and as a professor at • He is • Mr. Davies served as Director of the London School of Economics and Political Science from 2003 to 2011. He was Chairman of the U.K. Financial Services Authority, the U.K.’s financial regulator, from 1997 to 2003. • Mr. Davies previously served as Deputy Governor of the Bank of England from 1995 to 1997. He was Director General of the Confederation of British Industry from 1992 to 1995 and Controller of the Audit Commission in the U.K. from 1987 to 1992. • He worked at McKinsey
Other Current Directorships: Prudential plc
Qualifications, Attributes and Skills: Mr. Davies brings an international perspective to the Board as well as extensive financial regulatory, accounting and risk management experience from his years of accomplished public service. |
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Thomas H. Glocer (53) Director Nominee | Professional Experience: • Mr. Glocer served as Chief Executive Officer of Thomson Reuters Corporation, a news and information provider for businesses and professionals, from April 2008 through December 2011 and as Chief Executive Officer of Reuters Group PLC from July 2001 to April 2008. He joined Reuters Group PLC in 1993 and served in a variety of executive roles before being named Chief Executive Officer. • He was a mergers and acquisitions lawyer at the law firm Davis Polk & Wardwell LLP from 1984 to 1993. Other Current Directorships: Merck & Co., Inc. Other Directorships in the Past Five Years: Thomson Reuters Corporation Qualifications, Attributes and Skills: Mr. Glocer’s leadership positions, including as Chief Executive Officer of Thomas Reuters Corporation, provide extensive management experience as well as operational and technology experience and international perspective. | |
James P. Gorman Director Since 2010 |
Professional Experience: • Mr. Gorman has served as Chairman of the Board • He was Co-President of Morgan Stanley from December 2007 to December 2009, Co-Head of Strategic Planning from October 2007 to December 2009 and President and Chief Operating Officer of the Global Wealth Management Group from February 2006 to April 2008. • Mr. Gorman joined Merrill Lynch & Co., Inc. (Merrill Lynch) in 1999 and served in various positions including Chief Marketing Officer, Head of Corporate Acquisitions Strategy and Research in 2005 and President of the Global Private Client business from 2002 to 2005. • Prior to joining Merrill Lynch, he was a senior partner at McKinsey,
Other Directorships in the Past Five Years: MSCI Inc.
Qualifications, Attributes and Skills: As Chief Executive Officer of the Company, Mr. Gorman is a proven leader with an established record as a strategic thinker backed by strong operating, business development and execution skills and brings an extensive understanding of Morgan Stanley’s businesses and decades of financial services experience. |
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Robert H. Herz (59) Director Since 2012 | Professional Experience: • Mr. Herz has served as President of Robert H. Herz LLC, providing consulting services on financial reporting and other matters, since September 2010. He has also served as a senior advisor to, and as a member of, the Advisory Board of WebFilings LLC, a provider of financial reporting software, since 2011. • He served as Chairman of the Financial Accounting Standards Board from July 2002 to September 2010 and as a part-time member of the International Accounting Standards Board from January 2001 to June 2002. • Mr. Herz has served on the Accounting Standards Oversight Council of Canada since 2011 and as a member of the Standing Advisory Group of the Public Company Accounting Oversight Board since 2012. • Mr. Herz served as a partner in PricewaterhouseCoopers, an accounting firm, from 1985 until his retirement in 2002. Other Current Directorships: Federal National Mortgage Association (Fannie Mae) Qualifications, Attributes and Skills: Mr. Herz brings to the Board extensive regulatory, public accounting, financial reporting, risk management and financial experience through his private and public roles, including as Chairman of the Financial Accounting Standards Board. | |
C. Robert Kidder Director Since 1997 and Director at predecessor company since 1993 | Professional Experience: • Mr. Kidder served as Chairman and Chief Executive Officer of 3Stone Advisors LLC, a private investment firm, from 2006 to 2011, and as non-executive Chairman of the Board of Chrysler Group LLC from 2009 to 2011. • He was Principal at Stonehenge Partners, Inc., a private investment firm, from 2004 to 2006. Mr. Kidder served as President of Borden Capital, Inc., a company that provided financial and strategic advice to the Borden family of companies, from 2001 to 2003. • He was Chairman of the Board from 1995 to 2004 and Chief Executive Officer from 1995 to 2002 of Borden Chemical, Inc. (formerly Borden, Inc.), a forest products and industrial chemicals company. • Mr. Kidder was Chairman and Chief Executive Officer from 1991 to 1994 and President and Chief Executive Officer from 1988 to 1991 of Duracell International Inc. Prior to joining Duracell International Inc. in 1980, Mr. Kidder worked in planning and development at Dart Industries. He also previously worked at McKinsey & Co. as a general management consultant.
Other Current Directorships: Merck & Co., Inc.
Other Directorships in the Past Five Years: Chrysler Group LLC
Qualifications, Attributes and Skills: Mr. Kidder brings to the Board extensive financial and senior executive experience, including in business development, operations and strategic planning, as well as a deep understanding of our Company, particularly in his capacity as Lead Director appointed by our independent directors. |
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Klaus Kleinfeld Director | Professional Experience: • Mr. Kleinfeld has served as Chairman and • He served as President and • Mr. Kleinfeld served for 20 years at Siemens AG from 1987 to 2007, including as • He serves on the Brookings Institution Board of Trustees and is Chairman of the U.S.-Russia Business Council.
Other Current Directorships:Alcoa
Qualifications, Attributes and Skills:Mr. Kleinfeld brings to the Board extensive international and senior executive experience, including in business development, operations and strategic planning at multinational organizations. |
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Donald T. Nicolaisen Director Since 2006 | Professional Experience: • Mr. Nicolaisen was Chief Accountant for the U.S. Securities and Exchange Commission (SEC) from 2003 to 2005, where he served as the principal advisor to the SEC on accounting and auditing matters and was responsible for formulating and administering the accounting program and policies of the SEC. • He was a partner of PricewaterhouseCoopers, an accounting firm, from 1978 to 2003 and first joined Price Waterhouse in 1967. • Mr. Nicolaisen led Price Waterhouse’s national office for accounting and SEC services and its financial services practice and was responsible for auditing and providing risk management advice to large, complex multi-national corporations.
Other Current Directorships: MGIC Investment Corporation, Verizon Communications Inc. and Zurich
Qualifications, Attributes and Skills:Mr. Nicolaisen brings to the Board over 40 years of regulatory, public accounting and financial reporting, risk management and financial experience and the varied perspectives he has gained in the private sector as well as through distinguished service at the SEC. | |
Hutham S. Olayan Director Since 2006 |
Professional Experience: • Ms. Olayan has been a principal and director since 1981 of The Olayan Group, a private multinational enterprise that is a diversified global investor and operator of commercial and industrial businesses in Saudi Arabia. • • Ms. Olayan is a member of the International Advisory Board of The Blackstone Group and a former director of Equity International and Thermo Electron Corporation.
Qualifications, Attributes and Skills: Ms. Olayan’s extensive financial experience in the U.S. and internationally, including the Middle East, strengthens the Board’s global perspective. |
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James W. Owens Director Since 2011 | Professional Experience: • Mr. Owens served as Chairman and Chief Executive Officer of Caterpillar Inc. (Caterpillar), a manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines, from 2004 to 2010. • He served as Vice Chairman of Caterpillar • Mr. Owens served at Caterpillar • He held various managerial positions in the Accounting and Product Source Planning Departments from 1980 to 1987 and was chief economist of Caterpillar Overseas S.A. in Geneva, Switzerland, from 1975 to 1980. •
Other Current Directorships:Alcoa Inc. and International Business Machines Corporation
Other Directorships in the Past Five Years:Caterpillar Inc.
Qualifications, Attributes and Skills:Mr. Owens’ various leadership positions, including as Chief Executive Officer of a major global corporation, bring to the Board extensive management experience and economics expertise and | |
O. Griffith Sexton Director Since 2005 |
Professional Experience: • Mr. Sexton has served as an adjunct professor at Columbia Business School since 1995 and visiting lecturer at Princeton University since 2000, teaching courses in corporate finance. • He was an Advisory Director of Morgan Stanley from 1995 to 2008. • Mr. Sexton joined Morgan Stanley in 1973 and was a Managing Director from 1985 to 1995, ultimately serving as Director of the Corporate Restructuring Group within the Advisory Services Department.
Other Current Directorships: Investor AB
Qualifications, Attributes and Skills: Mr. Sexton brings to the Board extensive financial services, accounting and risk experience as well as substantive knowledge of Morgan Stanley’s businesses from his nearly 40 years of prior service at the Company. |
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Ryosuke Tamakoshi Director Since 2011 | Professional Experience: • Mr. Tamakoshi has served as a Senior Advisor of The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU) since June 2010. • • Mr. Tamakoshi began his professional career at The Sanwa Bank, one of the legacy banks of BTMU, in 1970.
Other Directorships in the Past Five Years:
Qualifications, Attributes and Skills: As a senior officer advisor to BTMU and as former Chairman of | |
Masaaki Tanaka (59) Director Since 2011 |
Professional Experience: • Mr. Tanaka • He served as Resident Managing Officer for the United States
• Mr. Tanaka was President and Chief Executive Officer of UnionBanCal Corporation and its primary subsidiary, Union Bank, N.A., • Following the merger of The Bank of Tokyo-Mitsubishi, Ltd. (BTM) and UFJ Bank, Ltd., which created BTMU, • From 1996 to 2005, Mr. Tanaka served in various capacities in the Corporate Planning Division of BTM and was Executive Officer and General Manager of the Corporate Banking Division with responsibility for relationships with leading corporations. He was also General Manager of the Corporate Business Development Division where he directed strategic planning and coordination of the company’s corporate banking business. • Mr. Tanaka began his professional career at the Mitsubishi Bank, a predecessor to BTMU, in 1977.
Other Current Directorships: MUFG Other Directorships in the Past Five Years:UnionBanCal Corporation
Qualifications, Attributes and Skills:As a senior officer of |
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Laura D. Tyson Director Since 1997 | Professional Experience: • Dr. Tyson has served as the S. K. and Angela Chan Professor of Global Management since 2008 and • She was Dean of the London Business School from 2002 to 2006. • Dr. Tyson was Dean from 1998 to 2001 and Class of 1939 Professor in Economics and Business Administration from 1997 to 1998 at the Walter A. Haas School of Business, University of California, Berkeley. • She served as National Economic Advisor to the President and Chair of the President’s National Economic Council from 1995 to 1996 and as Chair of the White House Council of Economic Advisors from 1993 to 1995. • Dr. Tyson has served as a member of the Foreign Affairs Policy Board, U.S. State Department, since 2012. • She served on the President’s Economic Recovery Advisory Board from 2009 to 2011 and was appointed in 2011 to the President’s Council on Jobs and Competitiveness.
Other Current Directorships: AT&T Inc., CBRE Group, Inc. and Silver Spring Networks, Inc.
Other Directorships in the Past Five Years: Eastman Kodak Company
Qualifications, Attributes and |
Our Board unanimously recommends athat you vote “FOR” the election of all director nominees. Proxies solicited by the Board will be voted “FOR” each nominee unless otherwise instructed.
Morgan Stanley is committed to maintaining best-in-class governance practices and has implemented the following:
Shareholders who own at least 25% of common stock have the ability to call a special meeting of shareholders;
No supermajority vote requirements in our charter or bylaws;
All directors are elected annually by majority vote standard;
Our Board has a majority of independent directors;
Our Board has financial services experience and a diverse international background; and
LeadOur lead independent director is appointed, and reviewed annually, by the other independent directors; and
Board policy favors committee chair and lead director rotation.directors.
Morgan Stanley has a corporate governance webpageweb page atmorganstanley.com/about/company/governance that includes the following:
Corporate Governance Policies (including our Director Independence Standards)
Code of Ethics and Business Conduct
Board Committee Charters
Policy Regarding Corporate Political Contributions
Policy Regarding Shareholder Rights Plan
Information Regarding the Integrity Hotline
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Information Regarding the Equity Ownership Commitment
Policy Regarding Communication by Shareholders and Other Interested Parties with the Board of Directors
Shareholders and other interested parties may contact any of our Company’s directors (including the Lead Director or non-management directors) by writing to them at Morgan Stanley, Suite D, 1585 Broadway, New York, New York 10036. Such communications will be handled in accordance with the procedures approved by the Company’s independent directors.
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Policy Regarding Director Candidates Recommended by Shareholders
Shareholders may submit recommendations for director candidates for consideration by the Nominating and Governance Committee at any time by sending the information set forth in the policy to the Nominating and Governance Committee, Morgan Stanley, Suite D, 1585 Broadway, New York, New York 10036. Under the policy, in order for director candidate recommendations to be considered for the 20132014 annual meeting of shareholders, recommendations must be submitted in accordance with the policy by December 7, 2012.November 28, 2013.
Policy Regarding Corporate Political Contributions
Policy Regarding Shareholder Rights Plan
Information Regarding the Integrity Hotline and the Equity Ownership Commitment
Hard copies of these materials are available to any shareholder who requests them by writing to Morgan Stanley, Suite D, 1585 Broadway, New York, New York 10036.
The Board has determined that Messrs. Bostock, Bowles, Davies, Glocer, Herz, Kidder, Kleinfeld and Nicolaisen, Ms. Olayan, Messrs. Owens and Sexton, and Ms.Dr. Tyson and Mr. Hance, who is not standing for re-election, are independent in accordance with the Director Independence Standards established under our Corporate Governance Policies. The Board has also determined that James H. Hance, Jr., who did not stand for election at the 2012 annual meeting of shareholders, was independent in accordance with the Director Independence Standards established under our Corporate Governance Policies during the period he served on the Board in 2012.
To assist the Board with its determination, the standardsDirector Independence Standards follow New York Stock Exchange (NYSE) rules and establish guidelines as to employment and commercial relationships that affect independence and categories of relationships that are not deemed material for purposes of director independence. TenEleven of 1314 of our current directors are independent. Uponindependent, and, upon the election of the current slate of director nominees, 1011 of our 1314 directors will be independent.
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In making its determination as to the independent directors, the Board reviewed relationships between Morgan Stanley and the directors, including:
Relationship | Director(s) | |
Commercial relationshipsin the last three years between Morgan Stanley and entities where the directors are employees or executive officers, or their immediate family members are executive officers, that did not exceed the greater of $1 million or 2% of such other entity’s consolidated gross revenues in any of the last three years
| Bostock, Davies, Kleinfeld, Olayan and Tyson | |
Ordinary course relationships arising from transactions on terms and conditions substantially similar to those with unaffiliated third parties between Morgan Stanley and entities where the directors or their immediate family members own equity of 5% or more of that entity
| Bostock | |
Morgan Stanley’scontributions to charitable organizations where the directors or their immediate family members serve as officers, directors or trustees that did not exceed the greater of
| Bostock, Bowles, Davies, Glocer, Hance, Kidder, Kleinfeld, Olayan, Owens and | |
Directors’utilization of Morgan Stanley products and services in the ordinary course of business on terms and conditions substantially similar to those provided to unaffiliated third parties | Bostock, Hance, Herz, Kidder, Owens, Sexton and Tyson |
In determining Mr. Bostock’s independence, the Board also considered the restructuring in January 2012 of the Company’s relationship with FrontPoint Partners LLC (FrontPoint), a former subsidiary within the Company’s Asset Management segment, of which Mr. Bostock’s son-in-law is Co-Chief Executive Officer and a significant equity owner. The Board considered that Mr. Bostock was not involvedowner in any discussions or decisions regarding the restructuring; thatFrontPoint Partners LLC (FrontPoint). In January 2012, the Company has ceased to have anrestructured its relationship with FrontPoint by exchanging the Company’s equity interestinterests (representing not more than a 24.9% equity interest) in FrontPoint; Mr. Bostock’s son-in-law is no longer an employeeFrontPoint for revenue shares in remaining funds and a share of the Company as of March 1, 2011; and any future commercial activities with FrontPoint will be inasset sale proceeds. The Company continued not to control FrontPoint after the ordinary course of business and on substantially the same terms as those prevailing at the time for comparable services for unaffiliated third parties.restructuring. The Board (other than Mr. Bostock) determined, consistent with NYSE rules and based upon the facts and circumstances, that the relationship is immaterial to Mr. Bostock’s independence (see also “Certain Transactions” herein).
In determining Mr. Sexton’s independence, the Board (other than Mr. Sexton) considered that the Company provides Mr. Sexton with access to medical insurance, for which Mr. Sexton pays the full cost, and determined, consistent with NYSE rules and based upon the facts and circumstances, that the relationship is immaterial to Mr. Sexton’s independence.
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Director Attendance at Annual Meeting
The Company’s Corporate Governance Policies state that directors are expected to attend annual meetings of shareholders. All 12 of the current directors who were on the Board at the time and Mr. Kleinfeld, who was nominated for election at the time, attended the 20112012 annual meeting of shareholders. One of the 13 directors on the Board of Directors at the time of the 20112012 annual meeting of shareholders was not standing for re-election and did not attend the meeting.
Our Board met 1516 times during 2011.2012. Each director attended at least 75% of the total number of meetings of the Board and committees on which thesuch director served that were held during 20112012 while the director was a member. In addition to Board and committee meetings, our directors also discharge their duties through, among other things, informal group communications and discussions with the Lead Director, Chairman of the Board and Chief Executive Officer, members of senior management and others as appropriate regarding matters of interest.
The Company’s Corporate Governance Policies provide that non-management directors meet in executive sessions and that the Lead Director will preside over these executive sessions. The independent directors also meet in executive session at least once annually and the Lead Director presides over these executive sessions.
The Board’s standing committees, their membership and the number of meetings in 20112012 are set forth below. Charters for each of our standing committees are available at our corporate governance webpage.web page.
All members of the Audit Committee, the Compensation, Management Development and Succession (CMDS) Committee and the Nominating and Governance Committee satisfy the standards of independence applicable to members of such committees. All members of the Risk Committee and Operations and Technology Committee are non-employee directors and a majority of the members of such committees satisfy the independence requirements of the Company and the NYSE. Each member of the CMDS Committee is a “non-employee director,” as defined in Section 16 of the Securities Exchange Act of 1934, and is an “outside director” as defined by Section 162(m) of the Internal Revenue Code. In addition, the Board has determined that all members of the Audit Committee are “audit committee financial experts” within the meaning of current SEC rules.
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Committee | Current Members | Primary Responsibilities | Meetings Held in | |||||||||
Audit | Donald T. Nicolaisen (Chair) Howard J. Davies
O. Griffith Sexton | • | Oversees the integrity of the Company’s consolidated financial statements, compliance with legal and regulatory requirements and system of internal controls. | |||||||||
• | Oversees risk management and risk assessment guidelines in coordination with the Board, Risk Committee and Operations and Technology Committee and reviews the major franchise, reputational, legal and compliance risk exposures of the Company. | |||||||||||
• | Selects, determines the compensation of, evaluates and, when appropriate, replaces the independent auditor, and pre-approves audit and permitted non-audit services. | |||||||||||
• | Oversees the qualifications and independence of the independent auditor and performance of the Company’s internal auditor and independent auditor. | |||||||||||
• | After review, recommends to the Board the acceptance and inclusion of the annual audited consolidated financial statements in the Company’s Annual Report on Form 10-K.
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Compensation, Management Development and Succession
| Erskine B. Bowles (Chair) C. Robert Kidder Donald T. Nicolaisen Hutham S. Olayan | • | Annually reviews and approves the corporate goals and objectives relevant to the compensation of the Chief Executive Officer and evaluates his performance in light of these goals and objectives. | 14 | ||||||||
• | Determines the compensation of executive officers and other officers and employees as appropriate. | |||||||||||
• | Administers the Company’s equity-based compensation plans and cash-based nonqualified deferred compensation plans. | |||||||||||
• | Oversees plans for management development and succession. | |||||||||||
• | Reviews and discusses the Compensation Discussion and Analysis with management and recommends to the Board its inclusion in the proxy statement. | |||||||||||
• | Reviews the Company’s incentive compensation arrangements to help ensure that such arrangements are consistent with the safety and soundness of the Company and do not encourage excessive risk-taking, and are otherwise consistent with applicable related regulatory rules and guidance. | |||||||||||
• | See “Compensation Governance” and “Consideration of Risk Matters in Determining Compensation” herein.
| |||||||||||
Nominating and Governance |
Roy J. Bostock C. Robert Kidder
| • | Identifies and recommends candidates for election to the Board. | |||||||||
• | Recommends committee structure and membership. | |||||||||||
• | Reviews annually the Company’s | |||||||||||
• | Oversees the annual evaluation of the Lead Director, Board and its committees. | |||||||||||
• | Reviews and approves related person transactions in accordance with the Company’s Related Person Transactions Policy.
| |||||||||||
Operations and
| Donald T. Nicolaisen (Chair) Howard J. Davies
Ryosuke
Tamakoshi | • | Oversees the Company’s operations and technology strategy and significant investments in support of such strategy. | |||||||||
• | Oversees risk management and risk assessment guidelines and policies regarding operational risk.
|
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Committee | Current Members | Primary Responsibilities | Meetings Held in 2012 | |||||||
Risk | Howard J. Davies (Chair) Roy J. Bostock James
| • | Oversees the Company’s risk governance structure. | 8 | ||||||
• | Oversees risk management and risk assessment guidelines and policies regarding market, credit, liquidity and funding risk. | |||||||||
• | Oversees risk tolerance, including risk tolerance levels and capital targets and limits. | |||||||||
• | Oversees the Company’s capital, liquidity and funding. | |||||||||
• | Oversees the performance of the Chief Risk Officer. | |||||||||
* The Operations and Technology Committee was established in 2011 and held its inaugural meeting in July 2011.
1 | Effective July 2, 2012, Mr. Herz joined the Audit Committee. |
2 | Effective July 2, 2012, Mr. Owens, who was a member of the Nominating and Governance Committee, became Chair, and Dr. Tyson, who had served as Chair, concluded service on the committee. |
3 | Effective July 2, 2012, Mr. Kleinfeld joined the Nominating and Governance Committee. |
4 | Effective July 2, 2012, Mr. Sexton joined the Operations and Technology Committee. |
5 | Effective July 2, 2012, Mr. Owens and Dr. Tyson joined the Risk Committee. |
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Board Leadership Structure and Role in Risk Oversight
Board Leadership Structure.The Board is responsible for reviewing the Company’s leadership structure. As set forth in the Corporate Governance Policies, the Board believes that the Company and its shareholders are best served by maintaining the flexibility to have any individual serve as Chairman of the Board based on what is in the best interests of the Company at a given point in time, taking into consideration, among other things:
The composition of the Board;
The role of the Company’s independent Lead Director;
The Company’s strong corporate governance practices;
The Chief Executive Officer’s (CEO) working relationship with the Board; and
The challenges specific to the Company.
After a two-year transition period, Mr. Gorman assumed the additional role of Chairman of the Board, effective January 1, 2012, replacing John J. Mack as Chairman upon his retirement from the Board. The Board has determined that the appointment of a strong independent Lead Director (as described below), together with a combined CEOChairman and Chairman,CEO, serves the best interests of the Company and its shareholders. By serving in both positions, the CEO and Chairman is able to draw on his detailed knowledge of the Company to provide the Board, in coordination with the Lead Director, leadership in focusing its discussions and review of the Company’s strategy. In addition, a combined role of CEO and Chairman ensures that the Company presents its message and strategy to shareholders, employees and customersclients with a unified voice. The Board believes that it is in the best interest of the Company and its shareholders for Mr. Gorman to serve as Chairman and CEO at this time, considering the strong role of our independent Lead Director and other corporate governance practices providing independent oversight of management as set forth below.
Lead Director. The Corporate Governance Policies provide for an independent and active Lead Director that is appointed, and reviewed annually, by the independent directors with clearly defined leadership authority and responsibilities. Our Lead Director, C. Robert Kidder, was appointed by our other independent directors and has responsibilities including:
Presiding at all meetings of the Board at which the Chairman is not present;
Having the authority to call, and lead, sessions composed only of non-management directors or independent directors;
Serving as liaison between the Chairman and the independent directors;
Advising the Chairman of the Board’s informational needs;
Approving the types and forms of information sent to the Board;
Approving Board meeting agendas and the schedule of Board meetings and requesting, if necessary, the inclusion of additional agenda items; and
Making himself available, if requested by major shareholders, for consultation and direct communication.
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Independent Oversight of Management.The Company’s corporate governance practices and policies ensure substantial independent oversight of management. For instance:
The Board has a majority of independent and non-management directors. Ten outEleven of the 1314 director nominees are independent as defined by the NYSE listing standards and the Company’s more stringent Corporate Governance Policies and 12 out13 of the 1314 director nominees are non-management directors. All of the Company’s directors are elected annually.
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The Board’s key standing committees are composed solely of non-management directors.The Audit Committee, the Compensation, Management Development and SuccessionCMDS Committee, and the Nominating and Governance Committee are each composed solely of independent directors. The Operations and Technology Committee and Risk Committee consist of a majority of independent directors and include only non-management directors. The committees provide independent oversight of management.
The Board’s non-management directors meet regularly in executive session.The non-management directors meet regularly in executive session without management present and, consistent with the NYSE listing standards, at least annually, the independent directors meet in executive session. These sessions are chaired by the Lead Director.
Board Role in Risk Oversight. The Board has oversight for the Company’s enterprise risk management framework and is responsible for helping to ensure that the Company’s risks are managed in a sound manner. The committees discussed below assist the Board in its risk oversight. The Board established the Risk Committee, which is comprised solely of non-management directors, to assist the Board in the oversight of:
The Company’s risk governance structure;
The Company’s risk management and risk assessment guidelines and policies regarding market, credit and liquidity and funding risk;
The Company’s risk tolerance, including risk tolerance levels and capital targets and limits;
The Company’s capital, liquidity and funding; and
The performance of the Chief Risk Officer.
The Audit Committee retains responsibility for oversight of certain aspects of risk management, including review of the major franchise, reputational, legal and compliance risk exposures of the Company and the steps management has taken to monitor and control such exposure, as well as, in coordination with the Risk Committee and the Operations and Technology Committee, guidelines and policies that govern the process for risk assessment and risk management. The Operations and Technology Committee has responsibility for oversight of operational risk. The Audit Committee, Operations and Technology Committee, Risk Committee and Chief Risk Officer report to the entire Board on a regular basis.
As discussed under “Executive Compensation – Consideration of Risk Matters in Determining Compensation,” the Compensation, Management Development and SuccessionCMDS Committee works with the Chief Risk Officer and its independent compensation consultant to evaluate whether the Company’s compensation arrangements are consistent with the safety and soundness of the Company or encourage unnecessary or excessive risk-taking and whether any risks arising from the Company’s compensation arrangements are reasonably likely to have a material adverse effect on the Company.
The Board has also authorized the Firm Risk Committee, a management committee appointed and chaired by the CEO that includes the most senior officers of the Company, including the Chief Risk Officer, Chief Legal Officer and Chief Financial Officer, to oversee the Company’s global risk management structure. The Firm Risk Committee’s responsibilities include oversight of the Company’s risk management principles, procedures and limits and the monitoring of capital levels and material market, credit, liquidity and funding, legal, compliance, operational, franchise and regulatory risk matters, and other risks, as appropriate, and the steps management has taken to monitor and manage such risks. The Company’s risk management is further discussed in Part II, Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (20112012 (2012 Form 10-K).
Assessment of Leadership Structure and Risk Oversight. The Board has determined that its leadership structure is appropriate for the Company. Mr. Gorman’s role as CEO, his existing relationship with the Board, his
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understanding of Morgan Stanley’s businesses and his professional experience and leadership skills uniquely position him to serve as Chairman and CEO, while the Company’s Lead Director, Mr. Kidder, has proven
15
effective at enhancing the overall independent functioning of the Board. The Board believes that the combination of the Chairman and CEO, the Lead Director and the Chairmen of the Audit, CMDS, Risk and Operations and Technology committees provide the appropriate leadership to help ensure effective risk oversight by the Board.
The following table contains information with respect to the annual compensation (including deferred compensation) of our non-employee directors earned during 20112012 with respect to his or her Board service.
Director(1) | Fees Earned or Paid in Cash ($)(2) | Stock Awards ($)(3)(4) | Option Awards ($)(4) | Change in Pension Value and Nonqualified Deferred Compensation Earnings | All Other Compensation ($) | Total ($) | Fees Earned or Paid in Cash ($)(2) | Stock Awards ($)(3)(4) | Option Awards ($)(4) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||||||||||||||||
Roy J. Bostock | 95,000 | 250,000 | — | — | — | 345,000 | 95,000 | 250,000 | — | — | — | 345,000 | ||||||||||||||||||||||||||||||||||||
Erskine B. Bowles | 95,000 | 250,000 | — | — | — | 345,000 | 95,000 | 250,000 | — | — | — | 345,000 | ||||||||||||||||||||||||||||||||||||
Howard J. Davies | 112,917 | 250,000 | — | — | — | 362,917 | 115,000 | 250,000 | — | — | — | 365,000 | ||||||||||||||||||||||||||||||||||||
James H. Hance, Jr. | 102,917 | 250,000 | — | — | — | 352,917 | ||||||||||||||||||||||||||||||||||||||||||
Robert H. Herz | 41,319 | 208,333 | — | — | — | 249,652 | ||||||||||||||||||||||||||||||||||||||||||
C. Robert Kidder | 125,000 | 250,000 | — | — | — | 375,000 | 125,000 | 250,000 | — | — | — | 375,000 | ||||||||||||||||||||||||||||||||||||
Klaus Kleinfeld | 48,611 | 250,000 | — | — | — | 298,611 | ||||||||||||||||||||||||||||||||||||||||||
Donald T. Nicolaisen | 117,917 | 250,000 | — | — | — | 367,917 | 120,000 | 250,000 | — | — | — | 370,000 | ||||||||||||||||||||||||||||||||||||
Hutham S. Olayan | 85,000 | 250,000 | — | — | — | 335,000 | 85,000 | 250,000 | — | — | — | 335,000 | ||||||||||||||||||||||||||||||||||||
James W. Owens | 77,917 | 333,333 | — | — | — | 411,250 | 94,722 | 250,000 | — | — | — | 344,722 | ||||||||||||||||||||||||||||||||||||
O. Griffith Sexton(5) | 87,083 | 250,000 | — | — | — | 337,083 | 89,861 | 250,000 | — | — | — | 339,861 | ||||||||||||||||||||||||||||||||||||
Laura D. Tyson | 95,000 | 250,000 | — | — | — | 345,000 | 90,139 | 250,000 | — | — | — | 340,139 |
(1) Messrs. Gorman, Tamakoshi and Tanaka and employee directors received no compensation during 20112012 for Board service. No compensation information is included in the table for Mr. Mack, the Company’s 2011 Chairman of the Board, pursuant to SEC rules, because in 2011 he was an executive officer of the Company, other than a named executive officer, who did not receive any additional compensation for his services as a director.
(2) Represents the portion of the annual Board and Board committee retainers that was earned or deferred at the director’s election during 2011. Mr. Owens joined the Board of Directors on January 1, 2011 and, accordingly, his Board and committee retainers were prorated for service as described below.2012. Cash retainers for service on the Board and a Board committee are paid semi-annuallysemiannually in arrears for the period beginning at the 20112012 annual meeting of shareholders and concluding at the 20122013 annual meeting of shareholders (the 20112012 service period). Amounts in the table represent (i) cash retainers earned for a portion of the 20102011 service period (January 1, 20112012 to May 18, 2011,15, 2012, the date of the 20112012 annual meeting of shareholders) paid or deferred on May 18, 2011,15, 2012, (ii) cash retainers earned for a portion of the 20112012 service period (May 19, 201116, 2012 to November 18, 2011,15, 2012, the six-month anniversary of the 20112012 annual meeting of shareholders) paid or deferred on November 18, 2011,15, 2012, and (iii) cash retainers earned for a portion of the 20112012 service period (November 19, 201116, 2012 to December 31, 2011)2012) payable on May 15, 2012,14, 2013, the date of the 20122013 annual meeting of shareholders (or, if earlier, upon termination from the Board). Mr. Herz joined the Board of Directors on July 2, 2012 and, accordingly, his Board and committee retainers were prorated for service as described below.
The annual Board retainer for the 20112012 service period for each director is $75,000. In addition, the Lead Director, each of the Board committee chairs and each Board committee member receives additional annual retainers for the 20112012 service period, as set forth in the following table. Retainers are prorated when a director joins the Board or a Board committee at any time other than at the annual meeting of shareholders, (providedprovided that no retainers are paid if the director is elected to the Board less than 60 days prior to the annual meeting).meeting. Directors do not receive meeting fees.
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Retainer | ||||
Lead Director (Mr. Kidder) | $ | 30,000 | ||
| ||||
Committee Chair | ||||
Audit Committee (Mr. Nicolaisen)* | $ | 25,000 | ||
Compensation, Management Development and Succession Committee (Mr. Bowles) | $ | 20,000 | ||
Nominating and Governance Committee (Dr. Tyson) | $ | 20,000 | ||
Operations and Technology Committee (Mr. Nicolaisen)* | $ | 10,000 | ||
Risk Committee (Mr. Davies) | $ | 20,000 | ||
Committee Members | ||||
Audit Committee (Messrs. Davies, Hance and Sexton)* | $ | 10,000 | ||
Compensation, Management Development and Succession Committee (Messrs. Kidder and Nicolaisen and Ms. Olayan) | $ | 10,000 | ||
Nominating and Governance Committee (Messrs. Bostock, Kidder and Owens) | $ | 10,000 | ||
Operations and Technology Committee (Messrs. Davies and Hance)* | $ | 10,000 | ||
Risk Committee (Messrs. Bostock and Hance) | $ | 10,000 |
Retainer | ||||
Lead Director | $ | 30,000 | ||
Committee Chair | ||||
Audit Committee | $ | 25,000 | ||
Compensation, Management Development and Succession Committee | $ | 20,000 | ||
Nominating and Governance Committee | $ | 20,000 | ||
Operations and Technology Committee | $ | 10,000 | ||
Risk Committee | $ | 20,000 | ||
Committee Members | ||||
Audit Committee | $ | 10,000 | ||
Compensation, Management Development and Succession Committee | $ | 10,000 | ||
Nominating and Governance Committee | $ | 10,000 | ||
Operations and Technology Committee | $ | 10,000 | ||
Risk Committee | $ | 10,000 |
Directors can elect to receive all or a portion of their retainers for the 20112012 service period on a current basis in cash or shares of common stock or on a deferred basis in stock units under the Directors’ Equity Capital Accumulation Plan (DECAP). Directors receive dividend equivalents on stock units that are paid in the form of additional stock units. Messrs. Bostock, Davies, Hance,Herz, Kidder, Kleinfeld, Nicolaisen and Owens and Dr. Tyson received their retainers for the 20112012 service period in cash on a current basis. Messrs. Bowles and Sexton and Ms. Olayan deferred their retainers for the 20112012 service period into stock units (Elective Units). Elective Units are not subject to vesting or cancellation.
On May 18, 2011,15, 2012, the date of the 20112012 annual meeting of shareholders, each of Messrs. Bowles and Sexton and Ms. Olayan receivedwere granted a number of Elective Units in lieu of the remaining 50% of his or her cash retainers earned for the 20102011 service period that began on May 18, 2010,2011, the date of the 20102011 annual meeting of shareholders, and payable on such date determined by dividing the dollar value of such cash retainers by $24.3936,$14.2859, the volume-weighted average price of the common stock on the grant date.
On November 18, 2011,15, 2012, the six-month anniversary of the date of the 20112012 annual meeting of shareholders, each of Messrs. Bowles and Sexton and Ms. Olayan receivedwere granted a number of Elective Units in lieu of the first 50% of his or her cash retainers earned for the 20112012 service period and payable on such date determined by dividing the dollar value of such cash retainers by $14.2034,$16.2427, the volume-weighted average price of the common stock on the grant date.
(3) Represents the aggregate grant date fair value of the annual stock unit award for the 20112012 service period and, with respect to Mr. Owens,Herz, a prorated initial stock unit award, granted during 20112012, determined in accordance with the applicable accounting guidance for equity-based awards. The aggregate grant date fair value of annual stock units granted on May 18, 201115, 2012 for the 20112012 service period is based on $24.3936,$14.2859, the volume-weighted average price of the common stock on the grant date. The aggregate grant date fair value of the initial stock units granted to Mr. OwensHerz on February 1, 2011July 2, 2012 is based on $29.8294,$13.5756, the volume-weighted average price of the common stock on the grant date. For further information on the valuation of these stock units, see notes 2 and 20 to the consolidated financial statements included in the 20112012 Form 10-K.
Under DECAP, directors receive an equity award upon initial election to the Board (provided that they are elected to the Board no less than 60 days prior to the annual meeting and are not initially elected at the annual meeting) and an equity award annually thereafter on the date of the annual meeting of shareholders. The dollargrant date fair value of the initial equity award is $250,000, prorated for service until the annual meeting. The dollargrant date fair value of
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the annual equity award is $250,000. Initial and annual equity awards are granted in the form of 50% stock units that do not become payable until the director retires from the Board (Career Units) and 50% in
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the form of stock units payable on the first anniversary of grant (Current Units). Initial equity awards are fully vested upon grant. Annual equity awards are subject to monthly vesting until the one-year anniversary of the grant date. On May 18, 2011,15, 2012, the date of the 20112012 annual meeting of shareholders, directors received their annual equity awards for the 20112012 service period in the form of 10,248.5917,499.773 stock units (determined by dividing $250,000 by $24.3936, and allocating$14.2859), which were allocated 50% to Career Units and 50% to Current Units).Units. With respect to Career Units, directors may elect to extend deferral beyond retirement from the Board, subject to specified limitations. With respect to Current Units, directors may choose to defer receipt of the shares underlying Current Units beyond the anniversary of grant and may choose the form of distribution (lump sum or installment payments).
(4) The following table sets forth the aggregate number of shares underlying DECAP stock units and stock options outstanding at December 31, 2011.2012. The number of units set forth in the following table is rounded to the nearest whole number of units.
Name | Stock Units (#) | Stock Options (#)(a) | Stock Units (#) | Stock Options (#)(a) | ||||||||||||||||||
Roy J. Bostock | 35,904 | — | Roy J. Bostock | 48,753 | — | |||||||||||||||||
Erskine B. Bowles | 67,657 | — | Erskine B. Bowles | 92,400 | — | |||||||||||||||||
Howard J. Davies | 42,173 | 7,049 | Howard J. Davies | 52,992 | 7,049 | |||||||||||||||||
James H. Hance, Jr. | 18,732 | — | ||||||||||||||||||||
Robert H. Herz | Robert H. Herz | 15,393 | — | |||||||||||||||||||
C. Robert Kidder | 50,926 | 33,273 | C. Robert Kidder | 63,965 | 21,742 | |||||||||||||||||
Klaus Kleinfeld | Klaus Kleinfeld | 17,614 | — | |||||||||||||||||||
Donald T. Nicolaisen | 45,774 | — | Donald T. Nicolaisen | 59,204 | — | |||||||||||||||||
Hutham S. Olayan | 60,979 | — | Hutham S. Olayan | 84,978 | — | |||||||||||||||||
James W. Owens | 13,126 | — | James W. Owens | 30,906 | — | |||||||||||||||||
O. Griffith Sexton | 60,009 | — | O. Griffith Sexton | 84,252 | — | |||||||||||||||||
Laura D. Tyson | 25,459 | 25,847 | Laura D. Tyson | 38,176 | 16,448 |
(a) | Directors were awarded stock options annually under DECAP until February 8, 2005, at which point stock option awards were discontinued. As of December 31, |
(5)Mr. Sexton was an advisory director of the Company from May 1995 until September 2008 and was a full-time Company employee prior to becoming an advisory director. The Company provides Mr. Sexton with access to medical insurance, for which he pays the full cost.
Related Person Transactions Policy
Our Board has adopted a written Related Person Transactions Policy (Policy) requiring the approval or ratification by the Nominating and Governance Committee of transactions (including material amendments or modifications to existing transactions), where the Company is a participant, the transaction exceeds $120,000 and a related person (directors or director nominees, executive officers, 5% shareholders and immediate family members of the foregoing) has a direct or indirect material interest. Under the Policy, in determining whether to approve or ratify such Related Person Transactions, the Nominating and Governance Committee considers all relevant facts and circumstances, including, but not limited to: the terms and commercial reasonableness of the transaction; the size of the transaction; the materiality to, and interest of, the related person and the Company in the transaction; whether the transaction would, or would be perceived to, present an improper conflict of interest for the related person; and, if the related person is an independent director, the impact on the director’s independence. Certain Transactions are not subject to the Policy, including compensation of executive officers approved by the CMDS Committee and ordinary course commercial or financial services transactions between the Company and entity in which a related person has an interest if the transaction is made under terms and conditions and under circumstances substantially similar to those prevailing at the time for comparable transactions with unaffiliated third parties and the related person does not otherwise have a direct or indirect material interest in the transaction.
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Our subsidiaries may extend credit in the ordinary course of business to certain of our directors, officers and members of their immediate families. These extensions of credit may be in connection with margin loans, mortgage loans credit card transactions, revolving lines of credit andor other extensions of credit by our subsidiaries. TheThese extensions of credit are made in the ordinary course of business, on substantially the same terms, and conditions, including interest rates and collateral, requirements, as those prevailing at the time for comparable transactionsloans with other persons not related to the lender and do not involve more than the normal risk of collectability or present other unfavorable features.
Each of CIC,China Investment Corporation (CIC), MUFG and State Street Corporation (State Street) beneficially owns 5% or more of the outstanding shares of Morgan Stanley common stock as reported under “Principal Shareholders.” During 2011,2012, we engaged in transactions in the ordinary course of business with each of CIC, MUFG and State Street and certain of their respective affiliates, including investment banking, financial advisory, sales and trading, derivatives, investment management, lending, securitization and other financial services transactions. Such transactions were on substantially the same terms as those prevailing at the time for comparable transactions with unrelated third parties.
As part of the global strategic alliance between MUFG and the Company, on May 1, 2010, the Company and MUFG formed a joint venture in Japan of their respective investment banking and securities businesses by forming two joint venture companies. MUFG contributed the investment banking, wholesale and retail securities businesses conducted in Japan by Mitsubishi UFJ Securities Co., Ltd. into one of the joint venture entities named Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (MUMSS). The Company contributed the investment banking operations conducted in Japan by its subsidiary, Morgan Stanley MUFG Securities Co., Ltd. (MSMS), formerly known as Morgan Stanley Japan Securities Co., Ltd., into MUMSS (MSMS, together with MUMSS, the “Joint Venture”). MSMS will continuehas continued its sales and trading and capital markets business conducted in Japan. Following the respective contributions to the Joint Venture and a cash payment of 23 billion yen ($247 million), from MUFG to the Company, theThe Company owns a 40% economic interest in the Joint Venture and MUFG owns a 60% economic interest in the Joint Venture. The Company holds a 40% voting interest and MUFG holds a 60% voting interest in MUMSS, while the Company holds a 51% voting interest and MUFG holds a 49% voting interest in MSMS. Other initiatives that are part of the Company’s global strategic alliance with MUFG include a loan marketing joint venture in the Americas, business referral arrangements in Asia, Europe, the Middle East and Africa, referral agreements for commodities transactions and a secondment arrangement of personnel between MUFG and the Company for the purpose of sharing best practices and expertise.
On June 30, 2011, pursuant to the terms of a transaction agreement entered into on April 21, 2011 by theThe Company and MUFG, all the outstanding shares of Series B Non-Cumulative Non-Voting Perpetual Convertible Preferred Stock (Series B Preferred Stock) held by MUFG were converted into 385,464,097 shares of the Company’s common stock, including approximately 75 million shares resulting from the adjustment to the conversion ratio pursuant to the transaction agreement.
In December 2006, a son-in-law of Mr. Bostock became an employee in the Company’s Asset Management business segment due to the Company’s acquisition of FrontPoint. On March 1, 2011, the Company restructured its relationship with FrontPoint. As a result of the transaction, the Company ceased to control FrontPoint and Mr. Bostock’s son-in-law ceased to be an employee of the Company. As part of the restructuring, the Companyformerly held common and preferred equity interests in FrontPoint (representing in total not more than a 24.9% equity interest). Subsequently, in, where Mr. Bostock’s son-in-law is Co-Chief Executive Officer and a significant equity owner. In January 2012, the Company further restructured its relationship with FrontPoint by exchanging all its equity interest in FrontPoint (which is now 100% owned by FrontPoint management, including Mr. Bostock’s son-in-law) for revenue shares in remaining funds and a share of any future FrontPoint asset sale proceeds. The Company continuescontinued not to control FrontPoint after the most recent restructuring.
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Beneficial Ownership of Company Common Stock
Executive Equity Ownership Commitment
Members of the Company’s Operating Committee are subject to an Equity Ownership Commitment that requires them to retain at least 75% of common stock and equity awards (less allowances for the payment of any option exercise price and taxes) made to them while they arefor service on the Operating Committee. This commitment ties a portion of their net worth to the Company’s stock price and provides a continuing incentive for them to work towards superior long-term stock price performance. None of our executive officers have prearranged trading plans under SEC Rule 10b5-1. Executive officers also are prohibited from engaging in hedging strategies or selling short or trading derivatives involving Morgan Stanley securities.
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Director Career Stock Unit HoldingEquity Ownership Requirement
As indicated under “Director Compensation,” our independent directors generally receive an equity award upon initial election to the Board and receive an annual equity award thereafter with a grant date fair value of $250,000 (prorated in the case of the initial award) as part of their director compensation. 50% of each equity award granted to our independent directors does not become payable until the director retires from the Board (and may be deferred beyond retirement at the director’s election), which fosters a long-term ownership view.
Stock Ownership of Executive Officers and Directors
We encourage our directors, executive officers and employees to own our common stock; owning our common stock aligns their interests with those of shareholders.
The following table sets forth the beneficial ownership of common stock as of February 29, 201228, 2013 by our Chief Executive OfficerCEO and the other executive officers named in the “2011“2012 Summary Compensation Table” (the named executive officers or NEOs), directors and director nominees, and by all our directors and executive officers as of February 29, 2012,28, 2013, as a group. As of February 29, 2012,28, 2013, none of the common stock beneficially owned by our directors and NEOs was pledged.
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Common Stock Beneficially Owned as of February 29, 2012 | Common Stock Beneficially Owned as of February 28, 2013 | |||||||||||||||||||||||||||||||||||||||||||
Name | Shares(1) | Underlying Stock Units(2) | Subject to Stock Options | Total(2)(3) | Shares(1) | Underlying Stock Units(2) | Subject to Stock Options | Total(2)(3) | ||||||||||||||||||||||||||||||||||||
NAMED EXECUTIVE OFFICERS | ||||||||||||||||||||||||||||||||||||||||||||
James P. Gorman | 310,713 | 867,921 | 553,333 | 1,731,967 | 365,269 | 709,111 | 694,908 | 1,769,288 | ||||||||||||||||||||||||||||||||||||
Ruth Porat | 474,683 | 355,366 | 115,857 | 945,906 | 536,937 | 242,256 | 164,833 | 944,026 | ||||||||||||||||||||||||||||||||||||
Gregory J. Fleming | 123,098 | 419,682 | 20,224 | 563,004 | 216,958 | 250,003 | 40,448 | 507,409 | ||||||||||||||||||||||||||||||||||||
Colm Kelleher | 53,486 | 440,062 | 268,202 | 761,750 | 32,586 | 274,022 | 306,102 | 612,710 | ||||||||||||||||||||||||||||||||||||
Paul J. Taubman | 550,706 | 732,206 | 299,147 | 1,582,059 | 617,909 | 600,435 | 302,881 | 1,521,225 | ||||||||||||||||||||||||||||||||||||
DIRECTORS | ||||||||||||||||||||||||||||||||||||||||||||
Roy J. Bostock | 43,572 | 35,998 | — | 79,570 | 48,758 | 48,856 | — | 97,614 | ||||||||||||||||||||||||||||||||||||
Erskine B. Bowles | 1,000 | 67,833 | — | 68,833 | 1,000 | 92,594 | — | 93,594 | ||||||||||||||||||||||||||||||||||||
Howard J. Davies | 9,260 | 42,283 | 7,049 | 58,592 | 15,210 | 53,103 | 7,049 | 75,362 | ||||||||||||||||||||||||||||||||||||
James H. Hance, Jr. | 28,325 | 18,781 | — | 47,106 | ||||||||||||||||||||||||||||||||||||||||
Thomas H. Glocer(4) | 1,000 | — | — | 1,000 | ||||||||||||||||||||||||||||||||||||||||
Robert H. Herz | — | 15,425 | — | 15,425 | ||||||||||||||||||||||||||||||||||||||||
C. Robert Kidder | 70,452 | 51,059 | 33,273 | 154,784 | 75,638 | 64,100 | 21,742 | 161,480 | ||||||||||||||||||||||||||||||||||||
Klaus Kleinfeld(4) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Klaus Kleinfeld | — | 17,651 | — | 17,651 | ||||||||||||||||||||||||||||||||||||||||
Donald T. Nicolaisen | 4,704 | 41,176 | — | 45,880 | 4,704 | 59,329 | — | 64,033 | ||||||||||||||||||||||||||||||||||||
Hutham S. Olayan | 8,000 | 61,138 | — | 69,138 | 8,000 | 85,156 | — | 93,156 | ||||||||||||||||||||||||||||||||||||
James W. Owens | 5,000 | 13,160 | — | 18,160 | 5,000 | 30,971 | — | 35,971 | ||||||||||||||||||||||||||||||||||||
O. Griffith Sexton | 633,934 | 60,165 | — | 694,099 | 633,934 | 84,429 | — | 718,363 | ||||||||||||||||||||||||||||||||||||
Ryosuke Tamakoshi(5) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Masaaki Tanaka(5) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Laura D. Tyson | 32,154 | 25,525 | 25,847 | 83,526 | 37,340 | 38,256 | 16,448 | 92,044 | ||||||||||||||||||||||||||||||||||||
ALL DIRECTORS AND EXECUTIVE OFFICERS AS OF FEBRUARY 29, 2012 AS A GROUP (20 PERSONS) | 2,446,657 | 3,774,022 | 1,388,965 | 7,609,644 | ||||||||||||||||||||||||||||||||||||||||
ALL DIRECTORS AND EXECUTIVE OFFICERS AS OF FEBRUARY 28, 2013 AS A GROUP (20 PERSONS) | 2,096,764 | 2,448,176 | 1,378,236 | 5,923,176 |
(1)Each director, NEO and executive officer has sole voting and investment power with respect to his or her shares, except as follows: Mr. Gorman’s beneficial ownership includes 200,000Gorman – 62,719 shares held in a grantor retained annuity trust for which heMr. Gorman and his spouse are co-trustees, 600 shares held in a Uniform Gifts to Minors Act account for which Mr. Gorman is custodian and for which he disclaims beneficial ownership, and 500 shares held in a Uniform
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Transfer to Minors Act account for which Mr. Gorman’s spouse is custodian and for which he disclaims beneficial ownership; Mr. Taubman’s beneficial ownership includesFleming – 104,550 shares held in an irrevocable family trust for which Mr. Fleming’s spouse is a trustee and beneficiary; Mr. Taubman – 1,585 shares held by hisMr. Taubman’s spouse; Mr. Bostock’s beneficial ownership includesBostock – 1,775 shares held by hisMr. Bostock’s spouse; and Mr. Bowles’ beneficial ownership includesBowles – 1,000 shares held in a trust revocable by Mr. Bowles on 30 days’ notice.
(2) Shares of common stock held in a trust (Trust) corresponding to certain outstanding restricted stock units (RSUs). Directors and executive officers may direct the voting of the shares corresponding to theirsuch RSUs. Voting by executive officers is subject to the provisions of the Trust, as described in “Information Aboutabout the Annual Meeting – How Do I Submit Voting Instructions for Shares Held in Employee Plans?” Excludes long-term incentive program awards granted in 2013 and performance stock units (PSUs)granted in prior years because executive officers may not direct the voting of their PSUs.any shares corresponding to such awards prior to settlement of the applicable award.
(3) Each NEO and director beneficially owned less than 1% of the shares of common stock outstanding. All executive officers and directors as a group as of February 29, 201228, 2013 beneficially owned less than 1% of the common stock outstanding.
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(4) If elected to the Board at the 20122013 annual meeting of shareholders, Mr. Kleinfeld,Glocer, as a non-employee director, will receive an annual equity award under DECAP in the amountwith a grant date fair value of $250,000. See “Director Compensation” for further details regarding our director compensation arrangements.
(5) Messrs. Tamakoshi and Tanaka were designated by MUFG and elected to the Board pursuant to the Investor Agreement. They are not compensated by Morgan Stanley for their service on the Board. See “Principal Shareholders” regarding MUFG’s beneficial ownership of Company common stock.
The following table contains information regarding the only persons we know of that beneficially own more than 5% of our common stock.
Shares of Common Stock Beneficially Owned | ||||||||||||
Name and Address | Number | Percent(1) | ||||||||||
China Investment Corporation (CIC)(2) New Poly Plaza, No. 1 Chaoyangmen Beidajie Dongcheng District, Beijing 100010, People’s Republic of China
| 150,782,379 | 7.6 | % | |||||||||
Mitsubishi UFJ Financial Group, Inc.(3) 7-1, Marunouchi 2-chome Chiyoda-ku, Tokyo 100-8330, Japan
| 435,452,411 | 22.0 | % | |||||||||
State Street Corporation (State Street)(4) 225 Franklin Street, Boston, MA 02110
| 165,720,173 | 8.4 | % |
Shares of Common Stock Beneficially Owned | ||||||||||||
Name and Address | Number | Percent(1) | ||||||||||
CIC(2) New Poly Plaza, No. 1 Chaoyangmen Beidajie Dongcheng District, Beijing 100010, People’s Republic of China
|
|
125,114,454 |
|
|
6.4% |
| ||||||
MUFG(3) 7-1, Marunouchi 2-chome Chiyoda-ku, Tokyo 100-8330, Japan
| 435,452,411 | 22.2% | ||||||||||
State Street(4) 225 Franklin Street, Boston, MA 02110
| 178,923,589 | 9.1% |
(1) Percentages based upon the number of shares of common stock outstanding as of the record date, March 19, 2012,18, 2013, and the beneficial ownership of the principal shareholders as reported in SEC filings in notes 2-5 below.
(2) Based on the Schedule 13G filed on February 13, 20126, 2013 (as of December 31, 2012) by CIC and Harvest Investment Corporation. The Schedule 13G discloses that CIC had shared dispositive and shared voting power with respect to all beneficially owned shares reported.
(3) Based on the amended Schedule 13D filed on July 1, 2011 by MUFG. The amended Schedule 13D discloses that MUFG had sole dispositive and sole voting power with respect to the beneficially owned shares reported, including 3,435,259 shares held solely in a fiduciary capacity by certain affiliates of MUFG as the trustee of trust accounts or the manager of investment funds, other investment vehicles and managed accounts as of May 31, 2011 for which MUFG disclaims beneficial ownership.
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(4) Based on the Schedule 13G filed on February 13, 201212, 2013 (as of December 31, 2012) by State Street and State Street Bank and Trust Company, each acting in various fiduciary and other capacities. The Schedule 13G discloses that State Street had shared dispositive power as to 165,720,173178,923,589 shares and shared voting power as to 165,299,432178,350,345 shares; that 134,818,439121,031,132 shares beneficially owned by State Street Bank and Trust Company, a subsidiary of State Street, are held as trustee and investment manager on behalf of the Trust; and that State Street and State Street Bank and Trust Company disclaimed beneficial ownership of all shares reported in the Schedule 13G, except in their fiduciary capacity under the Employee Retirement Income Security Act of 1974. State Street Bank and Trust Company acts as a trustee for the Trust that holds shares of common stock underlying certain restricted stock units awarded to employees under severalvarious of the Company’s equity-based plans. See “Information About the Annual Meeting.”plans and an additional 25,826,687 shares are beneficially owned by State Street Bank & Trust and held in various capacities; and all shares reported are beneficially owned by State Street and its direct or indirect subsidiaries in their various fiduciary and other capacities, and, accordingly, another entity in every instance is entitled to dividends or proceeds of sale.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and certain of our officers to file reports with the SEC indicating their holdings of, and transactions in, our equity securities. The Company believes that during 2011,2012 our reporting persons complied with all Section 16(a) filing requirements, except that MUFG filed a late Form 4 to report the conversion to common stock of all of its shares of Series B Preferred Stock that had previously been reported by MUFG in a timely manner in an amendment to its Schedule 13D.
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The CMDS Committee currently consists of four (4) directors, including our Lead Director, all of whom are independent members of the Board under the NYSE listing standards and the independence requirements of the Company. The CMDS Committee operates under a written charter adopted by the Board. The CMDS Committee is responsible for reviewing and approving annually all compensation awarded to the Company’s executive officers, including the NEOs. In addition, the CMDS Committee administers the Company’s equity incentive plans and cash-based nonqualified deferred compensation plans, including reviewing and approving equity grants to executive officers. Information on the CMDS Committee’s processes, procedures and analysis of NEO compensation for 20112012 is addressed in the “Compensation Discussion and Analysis” (CD&A).
The CMDS Committee actively engages in its duties and follows procedures intended to ensure excellence in compensation governance, including those described below:
Retains its own independent compensation consultant to provide advice to the CMDS Committee on executive compensation matters.matters and evaluates the independence of such consultant and other advisors as required by any applicable law, regulation or listing standard. The independent compensation consultant generally attends all CMDS Committee meetings, reports directly to the CMDS Committee Chair and regularly meets with the CMDS Committee without management present. In addition, the Chair of the CMDS Committee regularly speaksengages with the CMDS Committee’s compensation consultant, without management, outside of the CMDS Committee meetings.
Regularly reviews the competitive environment and the design and structure of the Company’s compensation programs to ensure that they are consistent with and support our compensation objectives.
Regularly reviews the Company’s achievements with respect to predetermined performance priorities and strategic goalsexecution of long-term strategy and evaluates executive performance in light of such achievements.
Regularly reviews legislative and regulatory developments affecting compensation in the U.S. and globally.
Annually reviews the Company’s incentive compensation arrangements to help ensure that such arrangements are consistent with the safety and soundness of the Company and do not encourage excessive risk-taking,risk taking, and are otherwise consistent with applicable related regulatory rules and guidance.
Grants senior executive annual incentive compensation after a comprehensive review and evaluation of Company, business unit and individual performance for the year both on a year-over-year basis and as compared to our key competitors.
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Oversees plans for management development and succession.
Regularly meets throughout the year and regularly meets in executive session without the presence of management or its compensation consultant.
Receives materials for meetings in advance, and the Chair of the CMDS Committee participates in pre-meetings with management to review the agendas and materials.
Regularly reports on its meetings to the Board.
As mentioned above, to perform its duties, the CMDS Committee retains the services of a qualified and independent compensation consultant that possesses the necessary skill, experience and resources to meet the CMDS Committee’s needs and that has no relationship with the Company that would interfere with its ability to provide independent advice. TheEffective October 2012, the CMDS Committee has selected Hay GroupPay Governance as its compensation consultant. Previously Hay Group has also been retained byserved as the CMDS Committee’s compensation consultant and as a consultant to the Nominating and Governance Committee with respect to provide consulting services on Board compensation. Other than the consulting services that it provides to theThe CMDS and Nominating and Governance Committees, Hay Group currently provides no services to the Company or its executive officers. Hay GroupCommittee’s compensation consultant assists the CMDS Committee in collecting and evaluating external market data regarding executive compensation and performance and advises the CMDS Committee on developing trends and best practices in executive compensation and equity and incentive plan design.
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The Company’s Human Resources department acts as a liaison between the CMDS Committee and Hay Groupits independent consultant and also prepares materials for the CMDS Committee’s use in making compensation decisions. Separately, the Human Resources department may itself engage third-party compensation consultants to assist in the development of compensation data and analyze potential compensation structures to inform and facilitate the CMDS Committee’s deliberations.
The principal compensation plans and arrangements applicable to our NEOs are described in the CD&A and the tables in the “Executive Compensation” section. The CMDS Committee may delegate the administration of these plans and arrangements as appropriate, including to executive officers of the Company and members of the Company’s Human Resources department. The CMDS Committee may also create subcommittees with authority to act on its behalf. Significant delegations made by the CMDS Committee include the following:
The CMDS Committee has delegated to the Equity Awards Committee (which consists of the Chief Executive Officer)CEO) its authority to make special new hire and retention equity awards; however, this delegation of authority does not extend to awards to our executive officers and certain other senior executives of the Company. Awards granted by the Equity Awards Committee are subject to a share limit imposed by the CMDS Committee and individual awards are reported to the CMDS Committee on a regular basis.
The CMDS Committee has delegated to the Chief Operating Officer its authority to administer the Company’s cash-based nonqualified deferred compensation plans, including the Morgan Stanley Compensation Incentive Plan (discussed in the CD&A); however, the CMDS Committee has sole authority relating to grants of cash-based nonqualified deferred compensation plan awards to, or amendments to such awards held by, executive officers and certain other senior executives, material amendments to any such plans or awards, and the decision to implement certain of these plans in the future.
Our executive officers do not engage directly with the CMDS Committee in setting the amount or form of executive officer compensation. However, as discussed in the CD&A, as part of the annual performance review for our executive officers other than the Chief Executive Officer,CEO, the CMDS Committee considers our Chief Executive Officer’sCEO’s assessment of each executive officer’s individual performance, as well as the performance of the Company and our Chief Executive Officer’sCEO’s compensation recommendations for each executive officer, other than himself.
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Annual year-end equity and cash-based long-term incentive awards are typically granted by the CMDS Committee after the end of the year.year (beginning with 2013, future-oriented equity-based long-term incentive awards may also be granted). This schedule coincides with the time when year-end financial results are available and the CMDS Committee can evaluate individual and Company performance as described in the CD&A. Special equity and cash-based long-term incentive awards are generally approved on a monthly basis; however, they may be granted at any time, as deemed necessary for new hires, promotions, recognition or retention purposes. We do not coordinate or time the release of material information around our grant dates in order to affect the value of compensation.
Consideration of Risk Matters in Determining Compensation
Beginning in 2009, theThe CMDS Committee has workedworks with the Company’s Chief Risk Officer and the CMDS Committee’s independent compensation consultant to evaluate whether the Company’s compensation arrangements encourage unnecessary or excessive risk-taking and whether risks arising from the Company’s compensation arrangements are reasonably likely to have a material adverse effect on the Company. Morgan Stanley is a financial institution that engages in significant trading and capital market activities that are subject to market and other risks. The Company employs risk management practices, including trading limits, marking-to-market positions, stress testing and employment of models. The Company believes in pay-for-performance and as a result also evaluates its compensation programs to recognize these risks.
In 2011,2012, the Chief Risk Officer had a series of interactive and detailed working sessionsmet with representatives from the Company’s Human Resources, Financial Control Group and Legal departments to evaluate each
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compensation program across each of the Company’s major areas – Institutional Securities, Asset Management, Global Wealth Management Group and Company/Infrastructure. These working sessions were intended to identify whether there were any material risks to the Company arising from such compensation programs, including those programs in which our NEOs participate. The review covered numerous programs, including equity-equity and cash-based deferred compensation programs, discretionary bonus programs and performance-based formulaic bonus programs. The working group reviewed a number of factors, including the eligibility, form of payment, applicable performance measures, vesting, clawback, holdback and cancellation provisions and governance and oversight aspects of each program.
In 2011,2012, the Chief Risk Officer concluded that Morgan Stanley’s current compensation programs do not incentivize employees to take unnecessary or excessive risk and that such programs do not create risks that are reasonably likely to have a material adverse effect on the Company. The following are among the factors considered in making his determination:
Our balance of fixed compensation and discretionary compensation;
Our balance between short-term and long-term incentives;
Our mandatory deferrals into both equity-based and cash-based long-term incentive programs;
The governance procedures followed in making compensation decisions, including our rigorous up-front risk adjustment process for assessing performance based on financial, capital and risk metrics;
The risk-mitigating features of our awards, such as cancellation, holdback and clawback provisions; and
Our equity retention requirements.
The Chief Risk Officer and the Global Head ofChief Human Resources Officer then reviewed these arrangements, along with the analyses and findings of the Chief Risk Officer, with the CMDS Committee and its independent compensation consultant. Before compensation decisions for 2011 were approved in January 2013, the Chief Risk Officer reviewed the final compensation programs pursuant to which 2011 compensation would be paid and confirmed his conclusions with the CMDS Committee.conclusions. It is intended that the Chief Risk Officer will continue to evaluate any new incentive arrangements for the NEOs and material arrangements for other employees, report periodically to the CMDS Committee and be involved in the design and assessment of our incentive arrangements to the extent appropriate or required under applicable law.
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In addition to the foregoing, the CMDS Committee regularly reviews with the Chief Executive Officer,CEO, Chief Risk Officer and senior management the Company’s controls regarding the year-end compensation process. These controls are structured to help eliminate incentives for excessive risk takingrisk-taking and have been designed to be consistent with the Federal Reserve Board’s principles for safety and soundness. For 2011, suchSuch controls included:include:
RedesigningSizing the process for sizing the year-end incentive compensation pool to more fully consider risk-adjusted returns, compliance with risk limits and the market and competitive environment;
Implementing a new process to allocateAllocating the incentive compensation pool among business areas to take into account the businesses’ returns on certain financial, capital and risk metrics;
ForIncreasing, generally for more senior-level employees, generally increasing the level of year-end deferrals subject to multi-year clawback and cancellation provisions; and
As described more fully in the CD&A, expanding clawback provisions to apply to both deferred equity and deferred cash awards; increasing the accountability of compensation managers for executing clawback and cancellation provisions with a focus on employee risk-taking;and considering an employee’s risk management activities and outcomes in making compensation decisions; and implementing a rigorous review process by the independent control functions of potential clawback and cancellation situations. Clawback provisions provide for the forfeiture of an award upon, among other things, the occurrence of certain losses and the employee’s violation of the Company’s risk policies and standards.
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Compensation Discussion and Analysis
This CD&A describes how the CMDS Committee considered the Company’s compensation objectives and approach; its business strategy and Company and individual performance against this strategy; and the other material factors that guide our executive compensation program, to arrive at 2011 compensation decisions for our NEOs: Mr. Gorman, our CEO, Ms. Porat, our Chief Financial Officer, Mr. Fleming, our President of Asset Management and Global Wealth Management, and Messrs. Kelleher and Taubman, our Co-Presidents of Institutional Securities. The CD&A is comprised of fourthe following sections:
Page: | ||||
27 | ||||
III. Framework for Making Compensation | 28 | |||
IV. | ||||
37 |
I. | Executive Summary |
Morgan Stanley ties executive compensation to Company and individual performance. The CMDS Committee of the Board, with the advice of its independent compensation consultant, Pay Governance, places performance at the forefront of the structure and administration of executive compensation. This performance orientation is demonstrated in the structure of executive compensation, the performance results that drive compensation decisions and the resulting executive compensation decisions for the CEO, James Gorman, and the other NEOs.
I.A. Executive Compensation Structure
In 2012, the CMDS Committee, in consultation with its independent consultant, conducted a comprehensive best practices review of CEO compensation in the financial services industry. In prior years, the compensation of the CEO had consisted of a base salary, together with a discretionary bonus awarded after year-end based on performance for the year. Approximately 20% of this bonus was awarded in the form of performance stock units (PSUs), the ultimate value of which was determined after three years based on the Company’s return on common equity (ROE) and relative total shareholder return (TSR).
As a result of this review, the CMDS Committee decided that it was a better practice to clearly separate the award of future-oriented, long-term incentive compensation from annual compensation awarded for the previous
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year’s performance. Accordingly, the CMDS Committee established a target amount for 2012 CEO annual performance compensation for a good performance year based upon market rates for similar CEO positions. The CMDS Committee further established an award amount, also based upon market comparables, for a future-oriented long-term incentive program (LTIP) based on 2013-2015 ROE and TSR. The CMDS Committee determined that $10 million was the appropriate target for CEO annual performance compensation for a good performance year, and that $3,750,000 was the appropriate target amount for the future-oriented LTIP award. These two target amounts resulted in a comprehensive target pay opportunity of $13,750,000 – representing the combination of compensation for 2012 annual performance and forward-looking LTIP performance for 2013-2015.
To arrive at these amounts, the CMDS Committee reviewed CEO compensation for 2011 both at the 12 financial companies in the S&P 100 and at the five large U.S. bank competitors of Morgan Stanley. For the financial companies in the S&P 100, the median and average CEO total pay opportunity was approximately $13-$14 million, of which annual performance compensation was approximately $10 million and the balance was in long-term incentives. For the five large U.S. bank competitors of Morgan Stanley, the median and average CEO total pay opportunity was approximately $15-16 million, of which annual performance compensation was approximately $12 million and the balance was in long-term incentives.
I.B. | 2012 Performance Results |
In recent years,2012, Company net revenues were $26.1 billion, net income was $68 million and ROE was 0.1%. Excluding the impact of a debt valuation adjustment (commonly referred to as “DVA”), Company net revenues were $30.5 billion, net income was $3.2 billion, and ROE was 5.2% in 2012. The reported $4.4 billion in negative DVA in 2012 resulted from Morgan Stanley’s credit spreads improving substantially over the course of the year. Morgan Stanley believes that most investors assess its results excluding DVA.
While 2012 financial performance was subpar, a strong financial foundation has made significant changesbeen built under Mr. Gorman’s leadership. From 2010, when he became CEO, to our executive compensation program in responseyear-end 2012, the Company has increased its Basel I Tier 1 Common ratio from 10.2% to the lasting impact of the global financial crisis on the industry. For 2011, Morgan Stanley has continued14.6%, increased common equity from $47.6 billion to refine the way we pay our executives, consistent with global regulatory principles, evolving best practices$60.6 billion and the Company’s risk policies – and reflecting shareholder input, the Company’s performance and the broader economic environment – so that a significantly greater portion of total compensation is “at-risk,” subjectreduced Basel I risk-weighted assets (RWAs) from $344 billion to clawback and tied to long-term Company performance. We believe these changes advance our goals of delivering pay-for-performance, attracting and retaining top talent and encouraging responsible risk-taking in a way that is aligned with the long-term interests of the Company’s shareholders. Furthermore, our compensation decisions for 2011 demonstrate our focus on long-term profitability and our commitment to balancing adequate returns for shareholders with appropriate rewards to retain and motivate top talent throughout economic cycles.$307 billion.
In 2011,addition to financial performance factors, several strategic factors were considered in evaluating 2012 performance for Mr. Gorman and other senior executives. The Company succeeded in completing the integration of the legacy Smith Barney and Morgan Stanley brokerage platforms. Also, the Morgan Stanley Wealth Management joint venture (Wealth Management JV) pretax margin increased from 11% in the first quarter to 17% in the fourth quarter. The Company increased its ownership of the Wealth Management JV to 65% by purchasing an incremental 14%, and locked in that valuation for the purchase of the remainder, subject to regulatory approvals. Substantial progress was made significant progress by addressing a numberin reducing Basel III RWAs in the Fixed Income and Commodities business from $390 billion in the second half of outstanding strategic2011 to $280 billion at year-end 2012. The Company achieved top-two rankings globally in Mergers and legacy issues –Acquisitions, Equity Underwriting and Equity Sales and Trading wallet share. Finally, successful Company-wide cost reduction actions were important foundational steps, including the conversionreduction of MUFG’s preferred investment into common stock andemployee headcount from 61,546 at the comprehensive settlement with MBIA – and achieved market share gains across our institutional businesses,beginning of 2012 to 55,529 as well as significant net flows into our Global Wealth Management and Asset Management platforms. While the Company made progress toward many of our key performance priorities, the Company did not fully meet all of our priorities for the year – which is reflected in the 2011 compensation decisions.January 31, 2013.
Pay-for-performance continues to be the core of our compensation program: our executives are held accountable for the Company’s performance as their total compensation is directly impacted by this performance and a significant component of executive compensation is tied to specific performance metrics over a three-year performance period. Consistent with our pay-for-performance philosophy, the Company implemented the following changes to our 2011 compensation:
We reducedIn determining Mr. Gorman’s compensation, for 2011 by 25% from 2010 to $10,500,000, reflecting the fact that the Company did not fully meet certain 2011 performance priorities.
We paid no cash bonus to members ofCMDS Committee also considered the Company’s Operatingtotal return to shareholders, which was 28% in 2012 – above the median of 23% for the S&P 500 Financials, but below the median of 36% for Morgan Stanley’s nine largest global competitors. Finally, in determining Mr. Gorman’s compensation, the CMDS Committee (for 2011, our eight most senior executives, includingalso considered that overall year-over-year compensation was broadly reduced for employees across the NEOs) and instead delivered 100% of year-end compensation in deferred long-term incentive awards subject to market and cancellation risk over a three-year period.Company.
We redesigned our “at-risk” performance stock unit program, which only delivers value if the Company meets specific performance targets after three years, to further moderate risk-taking incentives while continuing to incent performance.
We expanded our “clawback” provisions to apply to all long-term incentive compensation and enhanced our processes for preventing, investigating and addressing circumstances (such as poor risk outcomes, significant losses and improper employee behavior) that could require clawback or cancellation of previously awarded compensation, as well as adjustments to current year compensation.
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I.C. | Compensation Decisions |
Furthermore,
Based on the various elements of performance outlined above, the CMDS Committee determined Mr. Gorman’s annual performance compensation for 2012 at $6 million – 40% below the target annual performance compensation of $10 million. Annual performance compensation consisted of $800,000 in base salary, $2,575,000 in cash-based awards deferred over three years and $2,625,000 in stock option awards vesting over three years. In addition, Mr. Gorman received a 2013 LTIP award with a target value of $3,750,000, which converts to shares after three years only if predetermined performance goals are achieved over 2013-2015. As shown in the table below, Mr. Gorman’s comprehensive pay opportunity (2012 annual performance compensation when combined with 2013-2015 LTIP award) is $9,750,000 – a decline of 7% from the previous year.
Components of CEO Pay | 2011 Annual Decision | 2012 Annual/2013 LTIP Decisions | ||||||||||||||
Base Salary | $ | 800,000 | $ | 800,000 | ||||||||||||
Current Cash Bonus | $ | 0 | $ | 0 | ||||||||||||
Deferred Cash Award | $ | 2,716,000 | $ | 2,575,000 | ||||||||||||
At-Risk Equity Award | $ | 5,044,000 | $ | 2,625,000 | ||||||||||||
Future-Oriented, Performance-Based Equity Award | $ | 1,940,000 | $ | 3,750,000 | ||||||||||||
Comprehensive Pay Opportunity: | $ | 10,500,000 | $ | 9,750,000 |
Across the periods, the proportion of equity-based compensation has remained approximately the same. However, the proportion of that equity-based compensation that vests subject to future performance conditions has substantially increased. The mix of compensation for the other NEOs as disclosed herein is generally consistent with the CEO’s. For 2012, stock options, rather than restricted stock units, were granted to all NEOs other than the chief financial officer (CFO) in order to preserve the tax deductibility of the compensation to the Company (See “Tax Deductibility” under Section III.A).
Overall, while the CMDS Committee believes that the strategic and financial foundations for future success have been put in place, the CEO’s and each NEO’s compensation has been reduced to reflect the Company’s 2012 performance. The alignment of pay and performance at the Company is also demonstrated by the fact that over the 2010-2012 period Mr. Gorman’s realizable pay has declined by approximately 31%, and the Company’s TSR has declined by about 34%. As a further demonstration of shareholder and strategic alignment, the PSUs granted to Mr. Gorman and the other NEOs as 20% of their 2009 annual performance award (for Mr. Gorman, a grant date target value of $2,853,151) were cancelled without payment for failure to meet performance goals over the 2010-2012 period.
II. | Compensation Objectives and Strategy |
Morgan Stanley is committed to responsible and effective compensation programs. The CMDS Committee continually evaluates the Company’s compensation programs with a view toward balancing the following key objectives:
Attract and Retain Top Talent. The Company competes for talent globally with investment banks, commercial banks, brokerage firms, hedge funds and other companies offering financial services, and the Company’s ability to sustain or improve its position in this highly competitive environment depends substantially on our long-standing objectiveability to continue to attract and retain the most qualified employees. In support of aligningour recruitment and retention objectives, we continually monitor competitive pay levels and we structure our incentive awards to include vesting, deferred payment and cancellation and clawback provisions that protect the Company’s interests.
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Deliver Pay for Sustainable Performance. Our executive compensation program emphasizes discretionary variable annual performance compensation and long-term incentive compensation with specific financial targets. Variable annual performance compensation is adjusted year-over-year to appropriately reward annual achievement of the Company’s financial and strategic objectives. Long-term incentive compensation is future-oriented and only rewards performance that serves shareholders’ interests by executing on the Company’s long-term business strategy. Both deferred annual incentives and long-term incentives promote sustained shareholder interests,value creation over the long term. The structure of the Company’s compensation program balances the objectives of delivering returns for 2011 we continuedshareholders and providing appropriate rewards to delivermotivate superior individual performance.
Align Executive Compensation with Shareholders’ Interests. The Company delivers a significant portion of the NEOs’ incentive compensation in deferred equity awards.awards to align employee interests with those of shareholders. The CMDS Committee believes that linking compensation amounts to performance and delivering annual and long-term incentives primarily as deferred equity awards that are subject to market, cancellation and clawback risk over a multi-year period helps motivate executives to achieve financial and strategic goals. In addition, all NEOs mustmembers of the Operating Committee are required to retain at least 75% of the after-tax shares they receive as compensation andfor service on the Operating Committee. Executives are also prohibited from engaging in hedging any shares ofstrategies, selling short or trading derivatives with Company common stock. Assecurities. These policies tie a result, eachsignificant portion of our NEOsexecutive officers’ compensation directly to the Company’s stock price. Our executives also do not engage in pre-established written plans for trading in Company securities, commonly referred to as “Rule 10b5-1 programs.”
Mitigate Excessive Risk-taking. The CMDS Committee is oneadvised by the Company’s Chief Risk Officer and the CMDS Committee’s independent compensation consultant to help ensure that the structure and design of our long-term shareholders withcompensation arrangements do not encourage unnecessary or excessive risk-taking that threatens the sameCompany’s interests as our other shareholders. The NEOs’ beneficial ownershipor gives rise to risk that could have a material adverse effect on the Company. (See also the discussion of Company common stock asthe risk review of February 29, 2012 is set forthcompensation programs in the table “Stock Ownership“Compensation Governance – Consideration of Executive Officers and Directors.”
These measures build upon previous years’ efforts to refine our compensation program. For example,Risk Management in 2010, we reduced Mr. Gorman’s compensation as CEO from 2009 levels when he served as Co-President and increased the portion of year-end compensation delivered in deferred long-term incentive awards instead of cash bonus. In 2009, we introduced a multi-year performance program and increased our focus on up-front risk adjustment of compensation. In 2008, Morgan Stanley was the first major U.S. bank to enact “clawback” provisions and we continue to enhance these provisions.Determining Compensation.”)
Morgan Stanley’s executive compensation program is designed to achieve four key objectives:
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Under this program, PSUs granted in 2012 for 2011 performance will vest and convert to shares of Company common stock in 2015 only if the Company achieves predetermined performance goals over the three-year performance period. Participants will receive no portion of the award if the minimum performance goals are not met. The amounts granted to the NEOs – which constituted 20% of their 2011 year-end incentive compensation – are provided below under Section IV.C “2011 Compensation Decisions.”
The 2011 “at-risk” PSUs are tied directly to the Company’s long-term core financial metrics – specifically:
MS AVERAGE ROE* | Multiplier | |
12% or more | 1.50 | |
10% | 1.00 | |
6% | 0.50 | |
Less than 6% | 0.00 |
* If ROE is between two of the thresholds noted in the table, the number of PSUs earned will be determined by straight-line interpolation between the two thresholds. ROE, for this purpose, excludes (a) the impact of the fluctuation in the Company’s credit spreads and other credit factors (“Debt-Related Credit Spreads”) on certain of the Company’s borrowings that are accounted for at fair value, (b) gains or losses associated with the sale of specified businesses, (c) specified goodwill impairments, (d) any gain or loss, including accruals, associated with specified legal settlements relating to business activities conducted prior to January 1, 2011, and (e) specified cumulative catch-up adjustments resulting from changes in accounting principles that are not applied on a full retrospective basis.
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* Each 1% difference (positive or negative) in MS TSR as compared to the Index Group TSR results in a corresponding 1% (positive or negative) adjustment to the multiplier of 1.00.
The “at-risk” PSUs remain subject to cancellation upon certain events until conversion. If, after payment of the PSUs, the CMDS Committee determines that the performance certified by the CMDS Committee was based on materially inaccurate financial statements, then such number of shares (or cash equivalent if the shares were transferred) will be subject to clawback by the Company.
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* Mr. Kelleher is considered to be “Code Staff” as defined by the U.K. Financial Services Authority (FSA) for 2011 and, accordingly, his long-term incentive compensation awards differ from those granted to other NEOs as prescribed by the FSA and as described in Section IV.C.
The 2011 incentive2012 annual performance compensation of the NEOs was determined at the discretion of the CMDS Committee after consideration of Company financial and strategic performance against priorities established by the Committee at the beginning of the year,and individual performance, as well as compensation expense considerations, competitor compensation data relative pay considerations and, suchwith respect to the CEO, benchmarking data and other considerations set forth below.
Company and Individual Performance Review. To inform its use of discretion in Section IV.A.determining NEO annual performance compensation for 2012, the CMDS Committee evaluates Company and individual performance. The pre-establishedCMDS Committee does not utilize formulaic or non-formulaic financial performance priorities are non-formulaic in nature, do not require specificgoals or targets, and performance targets or preset goals to be met prior to the awarding of compensation andmetrics are not assigned any specific weighting. Toweighting for purposes of determining the extent the performance priorities were a factor in the CMDS Committee’s determination ofannual compensation ofawarded to the CEO or other NEOs. The CMDS Committee does not establish any targets with respect to the Company’s financial performance during the year for purposes of determining compensation, because the market and other NEOs, they are discussed in Section IV.B below.
Performance Priorities and Metrics. Atmacroeconomic environment (which impacts the beginning of 2011, in consultation withfinancial services industry) can change dramatically during the full Board,year. Instead, the CMDS Committee approved specificassesses actual financial performance priorities representing qualitative and/or quantitative measuresat the end of the year in five key areas: (1) Company financial performance; (2) business development; (3) financiallight of the most recent facts and operating risk management; (4) international businesses and alliance with MUFG; and (5) culture and stakeholder engagement.circumstances.
Absolute returns, as measured by returnFor 2012, the CMDS Committee evaluated Company performance against a number of financial and market metrics on equity;
Relative returns, as measured by return on equityan absolute basis and total shareholder return relative to a comparison group;
Capital strength, as measured by the Company’s Tier 1 capital ratio; and
Credit rating, as measured by the current rating assigned by the major rating agencies and outlook.
For 2011, the Company’s comparison group for purposesconsisting of setting the financial performance priorities included: Bank of America Corp., Barclays Plc, Citigroup Inc., Credit Suisse Group, Deutsche Bank AG, Goldman Sachs Group Inc., JPMorgan Chase & Co., UBS AG and Wells Fargo & Company.Company (Comparison Group). No single financial or market metric controlled compensation decisions, but rather the data were used to help the CMDS Committee better understand Company performance.
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Market Data and Review. The Company uses the Comparison Group to understand market practices and trends and to evaluate the competitiveness of our compensation programs. Throughout the year, the CMDS Committee reviewed analyses of our competitors’ pay levels, including historical compensation data obtained from public filings and compensation surveys conducted by consultants on an unattributed basis, and compensation plan design. Our Comparison Group consists of companies that either directly compete with us for business and/or talent or are global organizations with scope, size or other characteristics similar to the Company’s that we consider for purposes of compensation for the CEO, CFO and other functional heads of our businesses. The market compensation information considered by the CMDS Committee is either prepared or validated by its independent compensation consultant. Other than with respect to the CEO as described under “Benchmarking” below, for 2012, the CMDS Committee did not target NEO compensation at a certain range compared to the Comparison Group. Rather, the CMDS Committee used this information to better understand the market and to inform its discretionary compensation decisions.
Benchmarking of Target Annual CEO Pay. As noted in Section I.A, the CMDS Committee, in consultation with its independent compensation consultant, established a target 2012 annual performance compensation for the CEO of $10 million. To inform its decision-making with respect to the appropriate target, the CMDS Committee reviewed the median and the average of 2011 compensation levels for the following two sample groups: (i) the 12 financial companies in the S&P 100 (Allstate, American Express, Bank of New York Mellon, Capital One Financial, MasterCard, MetLife, US Bancorp and the five U.S. companies within the Comparison Group); and (ii) the five U.S. companies within the Comparison Group. The CMDS Committee then utilized the range of results as a benchmark from which to set the annual performance compensation target for the CEO. The two sample groups are intended to provide benchmarks of our core peers and other financial institutions of similar size, scope and complexity.
Input and Recommendations from the Chief Executive Officer, Independent Directors and CMDS Committee’s Independent Consultant. At the end of the year, Mr. Gorman presented the CMDS Committee with a performance assessment and compensation recommendations for each NEO other than himself. The CMDS Committee reviewed these recommendations with the CMDS Committee’s independent compensation consultant to assess whether they were reasonable compared with the market for executive talent and met in executive session to discuss the performance of our CEO and the other NEOs and to determine their annual performance compensation. In addition, the CMDS Committee considered input on NEO compensation from the other independent directors and reviewed proposed CEO incentive compensation with the full Board (other than Mr. Gorman) in executive session.
Performance Priorities. The CMDS Committee and the full Board review performance priorities at the beginning of each year to guide their evaluation of Company and individual performance throughout the year. To inform its use of discretion in determining NEO annual performance compensation for 2012, the CMDS Committee reviewed performance priorities in the following areas throughout the year: (i) financial performance; (ii) business development for each primary business unit; (iii) risk management and controls; (iv) financial and operating risk management; (v) international businesses and the strategic alliance with MUFG; (vi) alignment between the Board and management on the articulation of Company strategy; and (vii) demonstration of “One Firm” culture and stakeholder engagement. These performance priorities are a directional assessment made at the beginning of the year and their attainment or non-attainment does not correspond to any specific compensation decision.
Tax Deductibility. Section 162(m) of the Internal Revenue Code (Section 162(m)) limits the tax deductibility of compensation for certain executive officers (other than the CFO) that is more than $1 million, unless the compensation qualifies as “performance-based.” While our policy, in general, is to preserve the tax deductibility of compensation paid to executive officers covered under Section 162(m), the CMDS Committee nevertheless may authorize awards or payments that might not be deductible if it believes they are in the best interests of the Company and its shareholders. To qualify as “performance-based” compensation, the award must be based on objective, pre-established performance criteria approved by shareholders or otherwise qualify as “performance-based” under Section 162(m) (for example, fair market value stock options).
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Morgan Stanley’s shareholder-approved Section 162(m) performance formula imposes a cap of 0.5% of adjusted pre-tax earnings (as defined) on the annual bonus paid to a designated officer (other than awards, such as stock options, that are otherwise “performance-based”). However, this formula was adopted in 2001 before the concept of DVA was established under accounting principles generally accepted in the U.S. (GAAP). As noted in Section I.B, 2012 results reflected over $4 billion of negative revenues as a result of Morgan Stanley’s credit spreads improving over the course of the year, an improvement that was a positive result for both the Company and its shareholders. As a result, Morgan Stanley also reports earnings information excluding the impact of DVA, as the Company believes this non-GAAP financial measure is useful for investors to allow better comparability of year-to-year operating performance.
For 2012, the CMDS Committee determined to preserve the tax deductibility of executive officer compensation to the Company through the grant of stock option awards that comply with Section 162(m) to all NEOs other than the CFO. The CMDS Committee believes that, in light of Company and individual performance, the grant of tax-deductible stock option awards appropriately rewards and incentivizes these NEOs and is therefore in the best interests of the Company and its shareholders.
To prevent DVA from having an impact, positive or negative, on the Section 162(m) performance formula, the Board has submitted for shareholder vote an amendment to the Section 162(m) performance formula to exclude the impact of DVA in determining the cap for annual performance compensation to designated officers (See “Item 6 – Company Proposal to Amend the Section 162(m) Performance Formula Governing Annual Performance Compensation for Certain Officers”). If the proposed amendment had been in effect for 2012, the CMDS Committee would have been able to grant tax-deductible restricted stock units, rather than tax-deductible stock options, to all NEOs for 2012 annual compensation.
In addition, to help preserve corporate tax-deductibility of future LTIP awards, the Board has submitted for shareholder approval an amendment to the Company’s equity plan to include performance criteria for such awards (See “Item 5 – Company Proposal to Amend the 2007 Equity Incentive Compensation Plan to Provide for Qualifying Performance-Based Long-Term Incentive Awards under Section 162(m)”). If approved by shareholders, the proposed amendments will apply beginning with performance periods starting on or after January 1, 2014.
In advance of these amendments, the deferred cash component of 2012 annual bonuses to the NEOs counted toward the cap generated by the existing performance formula, and the 2013-2015 LTIP award will count toward the cap generated by the 2013 performance formula.
Global Regulatory Principles. The Company’s compensation practices are subject to oversight by our regulators in the U.S. and internationally. Throughout 2012, senior management briefed the CMDS Committee on relevant regulatory developments in respect of compensation, including with regard to the mix of incentive compensation and the portion of compensation that should be deferred for certain populations, as well as principles of balanced risk-taking. For example, in 2012 the Federal Reserve continued to develop its policies on compensation during its ongoing review of incentive compensation policies and practices of the Company and other banking organizations. In addition, the U.K. Financial Services Authority prescribed the deferred compensation structure, including minimum deferral rates and the portion of incentive compensation granted as equity awards, for certain executives, including Mr. Kelleher.
Compensation Expense Considerations. Prior to determining individual NEO incentive compensation, the CMDS Committee reviewed and considered the relationship between Company performance, total compensation expense (which includes fixed compensation costs such as base salaries, benefits and commissions) and incentive compensation as a subset of overall compensation expense. The CMDS Committee approved an incentive compensation program for 2011 that metThis furthers the Committee’s objectivebalancing of balancing adequatethe objectives of delivering returns for shareholders withand providing appropriate rewards to retain and motivate top talent.
Market Data and Review. The CMDS Committee uses comparison groups to understand market practices and trends and to evaluate the competitiveness of our compensation programs. Throughout the year, the CMDS Committee reviewed analyses of our competitors’ pay levels, including historical compensation data obtained from analyses of public filings and compensation surveys conducted by consultants on an unattributed basis, and compensation plan design. Our comparison group consists of companies that either directly compete with us for business and/or talent or are global organizations with scope, size or other characteristics similar to the Company’s. Bank of America Corp., Barclays Plc, Citigroup Inc., Credit Suisse Group, Deutsche Bank AG, Goldman Sachs Group Inc., JPMorgan Chase & Co., UBS AG and Wells Fargo & Company are the companies that we consider for purposes of compensation for the CEO, CFO and other functional heads of our business. The market compensation information considered by the CMDS Committee is either prepared or validated by its independent compensation consultant. The CMDS Committee does not target NEO compensation at a certain range compared to any comparison group. Rather, the CMDS Committee uses this information to better understand the market and to inform our focus on pay-for-performance. The CMDS Committee also reviews and discusses trends regarding executive compensation with its compensation consultant.superior individual performance.
• | Relative Pay Considerations.We place importance on the pay relationships among members of our Operating Committee because we view our Operating Committee members as highly talented executives capable of rotating among the leadership positions of our businesses and key functions. Our goal is always |
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to be in a position to appoint our most senior executives from within our Company and to incent our people to aspire to senior executive roles. At year-end, the CMDS Committee reviewed the relative differences between the compensation for the CEO and other NEOs and the NEOs and other members of the Operating Committee. Consideration is also given to the year-over-year change in compensation for the CEO and NEOs relative to changes in the aggregate |
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Input and Recommendations from the Chief Executive Officer, Independent Directors and CMDS Committee’s Independent Consultant. All of our NEOs participated in our “360 degree” feedback process as part of their individual performance evaluations. Our Global Head of Human Resources discussed with the CMDS Committee the results of this process for our CEO, as well as Mr. Gorman’s business and individual accomplishments during the year. At the end of the year, Mr. Gorman presented the CMDS Committee with a performance assessment and compensation recommendations for each NEO other than himself. The CMDS Committee reviewed these recommendations with the Committee’s independent compensation consultant to assess whether they were reasonable compared with the market for executive talent and met in executive session to discuss the performance of our CEO and the other NEOs and to determine their year-end compensation. In addition, the CMDS Committee considered input on NEO compensation from the other independent directors.
Global Regulatory Principles. The Company’s compensation practices are subject to oversight by our regulators in the U.S. and internationally. Throughout 2011, senior management briefed the CMDS Committee on relevant regulatory developments in respect of compensation, including with regard to the mix of long-term incentive compensation and the portion of compensation that should be deferred for certain populations, as well as principles of balanced risk-taking. For example, the Board of Governors of the U.S. Federal Reserve System (the Federal Reserve), together with other U.S. federal banking regulators, issued final guidance in June 2010 to help ensure that incentive compensation paid by banking organizations does not encourage imprudent risk-taking that threatens the safety and soundness of the organization, and in 2011 the Federal Reserve continued to develop its policies on compensation during its ongoing review of incentive compensation policies and practices of the Company and other banking organizations. In addition, the FSA prescribed the deferred compensation structure, including minimum deferral rates and the portion of incentive compensation granted as equity awards, for certain executives and employees working in the U.K, including Mr. Kelleher.
“Say on Pay” Vote in 2011.2012. As previously disclosed, at the 20112012 annual meeting of shareholders, in alignment with the recommendations of the Board, a significant majority of our shareholders who voted on the matter approved, by advisory resolution, the compensation of the Company’s executives as disclosed in the Company’s 20112012 proxy statement (the 20112012 “say on pay” vote) and approved an advisory vote to hold an annual advisory vote on the compensation of executives as disclosed in the proxy statement.. The CMDS Committee believes that an annual advisory vote on executive compensation is consistent with our long-standing practice of seeking the views of, and engaging in discussions with, our shareholders on corporate governance matters and our executive compensation philosophy, policies and practices. In that regard, and in anticipation of the 20112013 “say on pay” vote, Company management solicited feedback from our shareholders and from proxy advisory services on the Company’s 20102012 compensation program and conveyed the feedback received to the CMDS Committee. Following the 20112012 annual meeting of shareholders, the CMDS Committee considered the results of the 20112012 “say on pay” vote, as well as the insights gained from our dialogue with shareholders, in determining 2011 compensation.vote. The changes to the 20112012 compensation program described in Sections I and III.A of this CD&A reflect the CMDS Committee’s evaluation of the vote results, and dialogue, as well as the CMDS Committee’s and the Company’s ongoing efforts to improve our executive compensation program and the quality of our executive compensation disclosures.
Tax Deductibility under Section 162(m)Clawback Policies and Procedures. In 2008, Morgan Stanley implemented a clawback for a substantial portion of incentive compensation and, in the years since, we have expanded the application of the clawback to cover all incentive compensation awards and a broad scope of improper employee behavior. (See Section IV.B “2012 Annual Compensation Program Details.”) To supplement compliance and escalation processes, the Company’s independent control functions (the Internal Revenue Code. Section 162(m)Audit, Legal, Risk and Finance departments) take part in an enhanced, robust review process for identifying and evaluating situations occurring throughout the course of the Internal Revenue Code (Section 162(m)) limits the deductibilityyear that could require clawback or cancellation of previously awarded compensation, for certain executive officers (other than the Chief Financial Officer) that is more than $1 million, unless theas well as adjustments to current-year compensation. Clawbacks of previously awarded compensation qualifies as “performance-based.” While our policy, in general, isare reviewed with a committee of senior management quarterly and reported to preserve the tax deductibility of compensation for executive officers covered under Section 162(m), the CMDS Committee nevertheless may authorize awardson a regular basis. In addition, the CMDS Committee adopted a global incentive compensation discretion policy that sets forth standards for the exercise of managerial discretion in annual performance compensation decisions and specifically provides that all managers must consider whether an employee effectively managed and supervised the risk control practices of his or payments that might not be deductible if it believes they are inher employee reports during the best interests of the Company and its shareholders and individuals may receive non-deductible payments resulting from awards made prior to becoming an executive officer. To qualify as “performance-based” compensation, the award must be based on objective, pre-established performance criteria approved by shareholders. This formula imposes a cap of 0.5% of our adjusted pre-tax earnings on “performance-based” compensation paid to designated executives who may be subject to the Section 162(m) limit.year.
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Evaluating Company and Individual Performance |
The CMDS Committee evaluated 2011 performance on a year-over-year basis with respect to financial and other factors, including the performance priorities established earlier in the year. The CMDS Committee specifically considered the following factors described below in determining NEO incentive compensation:annual performance compensation for the NEOs: Mr. Gorman, the CEO, Ms. Porat, the CFO, Mr. Fleming, the President of Global Wealth Management Group and Asset Management, and Messrs. Kelleher and Taubman, who served as the Co-Presidents of Institutional Securities during 2012. Mr. Taubman retired from his position as Co-President of Institutional Securities effective December 31, 2012, and will remain an employee through his anticipated end date of May 5, 2013. Mr. Kelleher became President of Institutional Securities effective January 1, 2013.
• | Company Financial Performance. |
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continuing operations of $.02 per diluted share and modest net income applicable to Morgan Stanley of $68 million for 2012. However, excluding the impact of DVA, revenues were $30.5 billion, up 6.9% from 2011, income from continuing operations was $1.64 per diluted share and the Company earned net income applicable to Morgan Stanley of $3.2 billion – up 74% from the prior year on a comparative basis. |
The Company had net revenues for 2011 of $32.4 billion, up 3% from 2010, and income from continuing operations of $1.26 per diluted share. Excluding the impact of the Company’s Debt-Related Credit Spreads on borrowings that are accounted for at fair value, revenues were $28.7 billion, down 11%. Operating results were adversely impacted by strategic actions that the Company undertook over the course of the year to strengthen capital and liquidity. These included the conversion of MUFG’s preferred shares into common stock, which resulted in a negative adjustment in the calculation of basic and fully diluted earnings per share of approximately $1.7 billion, as well as a comprehensive settlement with MBIA that resulted inInstitutional Securities reported a pre-tax loss of $1.7 billion.
As a resultbillion, compared with pre-tax income of the aforementioned strategic actions undertaken by the Company, Morgan Stanley significantly enhanced its common equity, liquidity and capital levels. As of December 31, the Company’s Tier 1 capital ratio under Basel I was 16.6% and its Tier 1 common ratio was 13.0%.
The Institutional Securities Business reported net revenues of $17.2$4.6 billion up 6% from 2010. Investment Banking net revenues were $4.2 billion, down 2% from 2010, as lower underwriting revenues were partially offset by increased advisory revenues, yet the Company maintained its leading positions in several important areas. Net revenues in Equity Sales and Trading were $6.8 billion, up 40% from 2010 reflecting, among other things, strength in derivatives, our electronic platform and positive revenue of $619 million related to2011. Excluding the impact of DVA, the wideningInstitutional Securities Group’s pre-tax income was $2.7 billion, compared with pre-tax income of the Company’s Debt-Related Credit Spreads on borrowings that are accounted for at fair value. Fixed Income and commodities sales and trading net revenues were $7.5 billion, up 27% from 2010 reflecting, among other things, high levels of market volatility and client activity$910 million in interest rate and currency products and positive revenues of $3.1 billion related to the impact of the widening of the Company’s Debt-Related Credit Spreads on borrowings that are accounted for at fair value, partly offset by the impact of a stressed credit environment and the loss related to the MBIA settlement.2011.
The Global Wealth Management Group deliveredreported pre-tax income from continuing operations of $1.6 billion compared with $1.3 billion in the prior year, and a pre-tax margin of 12% in 2012, the highest since the inception of the Wealth Management JV.
Asset Management reported pre-tax income from continuing operations of $590 million compared with $253 million in the prior year, and a pre-tax margin of 27%.
Strategic Initiatives. The Company during 2012 also passed several milestones in connection with its overall strategy to enhance shareholder returns:
Completion of the integration of the legacy Smith Barney and legacy Morgan Stanley brokerage platforms;
Purchase of an incremental 14% stake in the Wealth Management JV and agreement to fix that valuation for the purchase of the remaining 35% of the Wealth Management JV, subject to regulatory approvals;
Significant progress in the Global Wealth Management Group’s pretax margin, including a 17% margin in the fourth quarter;
A more rapid than expected reduction of Basel III RWAs in our Fixed Income and Commodities business, from $390 billion in mid-2011 to $280 billion at year-end 2012;
Achievement of top-two ranking globally in Announced Mergers and Acquisitions, Equity underwriting, and Equities Sales and Trading wallet share;
Successful firm-wide cost reduction efforts, including reducing employee headcount from 61,546 at the beginning of 2012 to 55,529 as of January 31, 2013, reflecting reductions in force and disciplined hiring programs; and
Launch of more than 35 collaborative initiatives to increase revenues and synergies between Institutional Securities and the Global Wealth Management Group.
As a result of these and other actions, Morgan Stanley entered 2013 well-positioned strategically and with strong capital and liquidity. Despite the substantial strategic progress that the Company made during 2012, overall performance was subpar, as reflected by ROE and relative TSR that were below the median of the Comparison Group. For 2012, Morgan Stanley’s ROE was 0.1% and 5.2% excluding the impact of DVA, and Morgan Stanley’s TSR was 28%. These results are reflected in the CMDS Committee’s pay decisions and in compensation outcomes.
Chief Executive Officer Performance. In addition to the Company’s full-year financial results and progress against the strategic initiatives discussed above, the CMDS Committee evaluated Mr. Gorman’s efforts to deliver strong performance across the business units.
Institutional Securities: The Company continued to have top rankings in advisory and equity underwriting within Investment Banking. Equity Sales and Trading remains one of the top franchises of its kind in the industry, offering clients expertise across a broad range of products in markets all over the world. Within Fixed Income and Commodities Sales and Trading, the Company is concentrating on areas of growth, and efficient and profitable use of capital to serve clients.
Global Wealth Management Group: The acquisition of another 14% stake in the Wealth Management JV and progress toward attaining pre-tax margin goals were key accomplishments this year.
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Asset Management: This business had strong performance against investment benchmarks and increased net revenues of $13.4 billion, up 6% from 2010 – driven by higher assetflows and pre-tax margin.
The CMDS Committee also assessed Mr. Gorman’s continuing efforts with respect to articulating and executing a Company-wide strategy to enhance profitability, maintaining sound risk management and net interest revenues. Pre-tax profitcontrols, deepening the Company’s strategic alliance with MUFG, and promoting cultural cohesion and engagement among employees. Finally, the CMDS Committee considered Mr. Gorman’s role during the first and second quarters of 2012 in responding to an industry-wide rating review announced by a major rating agency that led to a ratings change that was better than initially proposed by the agency.
• | Other NEO Performance.In determining the annual performance compensation of other NEOs, the CMDS Committee weighed the Company’s overall financial performance and, as applicable, business unit performance. |
Ms. Porat, Executive Vice President and Chief Financial Officer: The CMDS Committee assessed Ms. Porat’s continuous efforts with respect to maintaining strong financial controls and processes; developing and executing a prudent liquidity and funding program; driving capital management processes; and supporting strategic initiatives critical to fortifying the Company’s financial strength, including capital optimization across businesses. The CMDS Committee also considered Ms. Porat’s role in working closely with global and United States regulators, her efforts with investors and rating agencies, and her role in responding to the industry-wide rating review mentioned above.
Mr. Fleming, Executive Vice President and President of Global Wealth Management Group and Asset Management: With respect to the Global Wealth Management Group, the CMDS Committee considered Mr. Fleming’s efforts to achieve pre-tax margin increased modestly to 10% from 9% a year earlier. Netgoals, enhance fee-based asset flows, were $42.5 billion, up 30% from 2010,complete the integration of a technology platform across the Wealth Management JV and net new assets increased by $36 billion.pursue collaborative initiatives with Institutional Securities to enhance revenues. With respect to Asset Management, the CMDS Committee assessed Mr. Fleming’s efforts to foster improved investment performance, increase asset flows and enhance overall profitability.
Mr. Kelleher, Executive Vice President and Co-President of Institutional Securities (2012); President of Institutional Securities (since January 2013):The AssetCMDS Committee evaluated Mr. Kelleher’s efforts to enhance revenue share across Institutional Equities and Fixed Income and Commodities and to reduce Fixed Income Basel III RWAs to $280 billion as of the end of 2012, ahead of previously determined targets. The CMDS Committee also considered Mr. Kelleher’s efforts to position the business for regulatory rules pertaining to Basel III, derivatives reform and the Volcker Rule, among others, and to increase collaboration with the Global Wealth Management business had net revenues of $1.9 billion, down from $2.7 billion in 2010, as higher results in Traditional Asset Management were offset by lower gains on principal investments in the Merchant Banking and Real Estate Investing business. Assets under management or supervision were $287 billion, up 6% from 2010, and 75% of our Long-Only strategies outperformed their benchmarks on a 3-, 5- and 10-year basis.Group.
Mr. Taubman, Executive Vice President and Co-President of Institutional Securities (2012):The CMDS Committee considered that the Company continues to be the underwriter of choice for equity and initial public offerings, as evidenced by Investment Banking’s #1 rankings in Global IPOs and #2 rankings in Global Announced M&A and Global Equity. The CMDS Committee also considered the Company’s return on average common equity from continuing operations was 3.9%, whichimproved market share in investment grade debt underwriting and Mr. Taubman’s continuous efforts to strengthen client relationships, as well as his leadership role in the joint venture with MUFG.
IV. | Compensation Decisions and Program for 2012 and Future Years |
IV.A. | Compensation Decisions |
As discussed above, despite the progress the Company achieved in executing its strategy in 2012 under Mr. Gorman’s leadership, NEO compensation for 2012 was below the levels of the prior year, reflecting the Company’s financial performance for the year. The table below shows how the CMDS Committee viewed its compensation decisions for 2012 for the NEOs but is not a replacement for the disclosure required in the “2012 Summary Compensation Table.”
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The table below also lists the grant date target value of the 2013-2015 LTIP awards granted to the NEOs. The LTIP awards are not considered part of annual compensation as the grant value is not a function of prior-year performance and the realizable award value is dependent entirely on prospective performance over a multiyear performance period. The LTIP award grant value for each key executive was based on multifaceted benchmarking as described above for CEO annual compensation in Section III.A under “Benchmarking of Target Annual CEO Pay.”
Mr. Gorman | Ms. Porat | Mr. Fleming | Mr. Kelleher | Mr. Taubman | ||||||||||||||||
Base Salary(1) | $ | 800,000 | $ | 750,000 | $ | 750,000 | $ | 776,661 | $ | 750,000 | ||||||||||
Annual Performance Award: | ||||||||||||||||||||
Current Cash Bonus | — | — | — | — | — | |||||||||||||||
Equity Award(2) | $ | 2,625,000 | $ | 2,250,000 | $ | 2,425,000 | $ | 2,411,669 | $ | 2,425,000 | ||||||||||
MSCIP Award(3) | $ | 2,575,000 | $ | 2,250,000 | $ | 2,425,000 | $ | 2,411,670 | $ | 2,425,000 | ||||||||||
2012 Compensation Total: | $ | 6,000,000 | $ | 5,250,000 | $ | 5,600,000 | $ | 5,600,000 | $ | 5,600,000 | ||||||||||
2013-2015 LTIP Award:(4) | $ | 3,750,000 | $ | 2,750,000 | $ | 3,000,000 | $ | 3,000,000 | $ | 3,000,000 | ||||||||||
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Comprehensive Pay Opportunity: | $ | 9,750,000 | $ | 8,000,000 | $ | 8,600,000 | $ | 8,600,000 | $ | 8,600,000 |
(1) | 2012 base salaries remain unchanged from 2011. Mr. Kelleher’s base salary was £490,000 and was converted to U.S. dollars using the 2012 average of daily spot rates of £1 to $1.5850. |
(2) | Mr. Gorman received 484,827 stock options, Messrs. Fleming and Taubman received 447,888 stock options and Mr. Kelleher received 445,425 stock options (in each case, calculated using the Black-Scholes option value of $5.4143 on January 22, 2013, the grant date). The stock options have an exercise price per share of $22.98, the closing price of the Company’s common stock on the grant date, and expire on the fifth anniversary of grant. The stock options vest and become exercisable (and cancellation provisions lift) in three equal annual installments, with the exception of Mr. Taubman’s stock options, which are scheduled to vest and become exercisable upon his termination of employment (and transfer and cancellation restrictions lift in four equal installments beginning on June 1, 2013 and ending on December 15, 2014) in accordance with his separation and release agreement with the Company dated January 3, 2013 (Separation Agreement). Ms. Porat received 99,834.94 RSUs (calculated using $22.5372, the volume-weighted average price of Company common stock on the grant date, January 22, 2013). The RSUs are scheduled to vest and convert to shares of Company common stock (and cancellation provisions lift) in three annual installments. |
(3) | Deferred cash-based awards under the Morgan Stanley Compensation Incentive Program (MSCIP) are scheduled to vest and distribute (and cancellation provisions lift) in four installments beginning May 2013 and ending November 2015, with the following exceptions: Mr. Kelleher’s award (as prescribed by the UK Financial Services Authority) is scheduled to vest and distribute (and cancellation provisions lift) in three annual installments and Mr. Taubman’s award is scheduled to vest upon his termination of employment and distribute (and cancellation restrictions lift) in four installments beginning on June 1, 2013 and ending on December 15, 2014 in accordance with his Separation Agreement. |
(4) | The target number of performance stock units underlying the LTIP award granted to Mr. Gorman is 164,139.65 stock units, to Ms. Porat is 120,369.07 stock units and to Messrs. Fleming, Kelleher and Taubman is 131,311.72 stock units (in each case calculated using the volume-weighted average price of Company common stock of $22.8464 on January 31, 2013, the grant date). |
The CMDS Committee determined to increase the fixed compensation of the CEO and other members of the Operating Committee through base salary adjustments effective January 1, 2013. The 2013 base salaries are $1.5 million for Mr. Gorman, GBP 625,000 (which is intended to be approximately $1,000,000) for Mr. Kelleher and $1 million (or local currency equivalent) for each other member of the Operating Committee, including Ms. Porat and Mr. Fleming. The base salary adjustments were intended to bring Operating Committee base salaries in line with the base salaries paid to executives in comparable positions at other financial institutions and to achieve appropriate balance between fixed and at-risk variable compensation.
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IV.B. 2012 Annual Performance Compensation Program Details
Each NEO receives a base salary, which is intended to provide fixed pay based on the executive’s experience and level of responsibility, and is eligible to receive discretionary annual performance compensation for prior-year performance. Annual performance compensation is intended to reward NEOs for achievement of the Company’s financial and strategic objectives over the prior year.
Purpose | Features | |||
Mix of Current Cash and Deferred Awards | Deferral supports each of the Company’s key compensation objectives described in Section II. | NEOs received no current cash bonus (i.e., annual performance compensation paid in cash shortly following year-end (typically in February) that is not subject to vesting, cancellation, clawback or market conditions). | ||
• Equity Awards – Stock Options and RSUs | Equity awards support retention objectives and link realized value to shareholder returns. The terms of the awards serve to mitigate excessive risk-taking. Equity incentive compensation awards were granted in the form of stock options to the NEOs other than the CFO to maintain tax deductibility of compensation under Section 162(m) (See “Tax Deductibility” under Section III.A). | Awards are subject to vesting and generally cancelable upon termination of employment other than by the Company without cause or by the executive with 12 months’ advance notice. Awards are subject to cancellation for competition, cause (i.e., any act or omission that constitutes a breach of obligation to the Company, including failure to comply with internal compliance, ethics or risk management standards and failure or refusal to perform duties satisfactorily, including supervisory and management duties), disclosure of proprietary information and solicitation of employees or clients. Awards are subject to clawback if an employee’s act or omission (including with respect to direct supervisory responsibilities) causes a restatement of the Company’s consolidated financial results, constitutes a violation of the Company’s global risk management principles, policies and standards, or causes a loss of revenue associated with a position on which the employee was paid and the employee operated outside of internal control policies.* | ||
• MSCIP Deferred Cash-Based Awards | Deferred cash-based awards support retention objectives and mitigate excessive risk-taking. The awards provide a cash incentive with a rate of return based upon notional reference investments. |
* | Mr. Taubman’s awards are subject to specified cancellation and clawback provisions until the applicable distribution date in accordance with his Separation Agreement. |
IV.C. 2013-2015 Long-Term Incentive Program Details
For the past three consecutive years, the Company has granted a portion of annual compensation to key executives in the form of a long-term performance award that delivers value only if the Company achieves objective performance goals. The LTIP builds upon the program of the past three years and complements the Company’s existing annual performance compensation program for key executives. Like the Company’s prior multi-year performance program, the LTIP ties a meaningful portion of each executive’s compensation to the Company’s long-term financial performance and reinforces the executive’s accountability for the achievement of the Company’s future financial and strategic goals by directly linking the ultimate realizable award value to prospective performance against core financial measures over a forward-looking three-year period. However, in order to more directly align the new LTIP awards with Company performance over the long-term, the grant value of the award is not a function of individual or Company prior-year annual performance.
Award Terms. The LTIP awards will vest and convert to shares of the Company’s common stock in 2016 only if the Company achieves predetermined performance goals with respect to ROE and relative TSR, as set forth below, over the period beginning January 1, 2013 and ending December 31, 2015. While each key
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executive was awarded a target number of performance stock units, the actual number of units earned could vary from as few as zero, if performance goals are not met, to as much as two times target, if performance goals are meaningfully exceeded. No participant will receive any portion of the LTIP award if the threshold performance goals are not met. |
The LTIP awards remain subject to cancellation upon certain events until conversion to shares of Company common stock. If, after conversion of the LTIP awards, the CMDS Committee determines that the performance priority for 2011 and was an important performance measure consideredcertified by the CMDS Committee.Committee was based on materially inaccurate financial statements, then the shares delivered will be subject to clawback by the Company.
Performance Goals. One-half of the target LTIP award is earned based on the Company’s average ROE over the three-year performance period. The other half of the target LTIP award is earned based on the Company’s TSR over the three-year period (MS TSR) relative to the TSR of the S&P 500 Financials Index over the three-year period (Index Group TSR). The number of stock units ultimately earned will be determined by multiplying each half of the target award by a multiplier as follows:
MS Average ROE* | Multiplier | Relative TSR** | Multiplier | |||||
13% or more | 2.00 | 50% or more | 2.00 | |||||
10% | 1.00 | 0% | 1.00 | |||||
5% | 0.50 | -50% | 0.50 | |||||
Less than 5% | 0.00 | Less than -50% | 0.00 |
* | If ROE is between two of the thresholds noted in the table, the number of stock units earned will be determined by straight-line interpolation between the two thresholds. ROE, for this purpose, excludes (a) the impact of DVA, (b) gains or losses associated with the sale of specified businesses, (c) specified goodwill impairments, (d) any gain or loss, including accruals, associated with specified legal settlements relating to business activities conducted prior to January 1, 2011, and (e) specified cumulative catch-up adjustments resulting from changes in accounting principles that are not applied on a full retrospective basis. |
** | Relative TSR will be determined by subtracting the Index Group TSR from the MS TSR. In no event may the multiplier exceed 1.50 if MS TSR for the performance period is negative. If Relative TSR is between two of the thresholds noted in the table, the number of stock units earned will be determined by straight-line interpolation between the two thresholds. |
IV.D. Additional Compensation and Benefits Details.
Health and Insurance Benefits. All NEOs are eligible to participate in Company-sponsored health and insurance benefit programs available in the relevant jurisdiction, except that Mr. Kelleher participates in the international medical plan available to expatriates rather than the U.K. medical plan. In the U.S., higher-paid employees pay more to participate in the Company’s medical plan.
Personal Benefits. The Company provides limited personal benefits to certain of the NEOs for competitive reasons. The Company’s Board-approved policy authorizes the CEO to use the Company’s aircraft. For personal travel, Mr. Gorman entered into an aircraft time-share agreement with the Company as of January 1, 2010 and, since entering into such agreement, has fully reimbursed the Company for the incremental cost of his personal use of the Company’s aircraft. Personal benefits provided to NEOs are discussed under the “2012 Summary Compensation Table.”
Pension and Retirement. Company-provided retirement benefits in the U.S. include a tax-qualified 401(k) plan and a frozen pension plan (the Employees Retirement Plan (ERP)) for eligible employees hired before July 1, 2007. Effective after December 31, 2010, no further benefit accruals will occur under the ERP. NEOs may also be eligible to participate in the Company’s global Supplemental Executive Retirement and Excess Plan (SEREP). The SEREP was originally intended to compensate for the limitations imposed by the Internal Revenue Code on qualified pension plan benefits and eligible pay. When it was determined that SEREP benefits were no longer needed to remain competitive, the SEREP was generally closed to new participants. In view of his 27 years of service with the Company and in accordance with his Separation Agreement, Mr. Taubman will receive his accrued benefit through his employment end date under the
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SEREP, in accordance with the terms of the SEREP, determined as if he were eligible for early retirement. Company contributions to savings plans for NEOs are disclosed in the “2012 Summary Compensation Table.” Pension arrangements for NEOs are described under the “2012 Pension Benefits Table.” |
*
Severance. NEOs are not contractually entitled to cash severance payments upon termination of employment. Upon retirement, NEOs may be eligible to participate in retiree medical coverage under the Morgan Stanley Medical Plan on the same basis as other retired employees.
V. | Notes to the Compensation Discussion and Analysis |
The following notes are an integral part of the Company’s financial and operating performance described in this CD&A:
A detailed analysis of the Company’s financial and operational performance for 20112012 is contained in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the 20112012 Form 10-K.
TSR is the change in share price over a period of time plus the dividends paid during such period, expressed as a percentage of the share price at the beginning of such period.
DVA represents the change in fair value of certain of the Company’s long-term and short-term borrowings outstanding resulting from the fluctuation in the Company’s credit spreads and other credit factors.
Pre-tax profit margin and the pro forma Tier 1 common ratio under the proposed Basel III capital frameworkresults excluding DVA are non-GAAP financial measures that the Company considers useful measures for the Company and investors to assess operating performance and capital adequacy. For further information regarding these measures, please see pages 49, 5054-56 and 5368 of the 20112012 Form 10-K.
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Strengthening the Institutional Securities Business: Mr. Gorman’s focus on reinforcing the Company’s leadership in Investment Banking was evidenced by revenue share gains and top-tier positions on industry league tables in global completed and announced M&A, global IPOs and global Equity underwriting. Mr. Gorman also continued to execute on the Company’s strategic plan to build out the Sales and Trading business by realizing revenue share gains in both Equity and Fixed Income. In addition, Mr. Gorman continued to focus on internal initiatives to strengthen relationships and services for clients.
Driving Final StagesThe Company calculates its Basel I RWAs and Tier 1 Common Ratio in accordance with the capital adequacy standards for financial holding companies adopted by the Federal Reserve Board. For further information regarding these measures, please see pages 101-106 of the Integration of MSSB: Under Mr. Gorman’s leadership, the Company continued to advance the integration of MSSB, which included the initial rollout of a new technology platform. The integration of all 17,000 U.S. financial advisors onto a single operating platform is an important step in our plan to ensure that all clients are offered our full range of capabilities, improve margins, increase productivity and reduce costs. Additionally, the Global Wealth Management Group realized the highest net managed money flows since the inception of the MSSB joint venture.2012 Form 10-K.
Continued RepositioningThe Company estimates its Basel III RWAs based on a preliminary analysis of Basel III guidelines published to date and Revitalization of Asset Managementother factors. This is a preliminary estimate and subject to Drive Performance: Mr. Gorman continued to refocus Asset Management on realizing the competitive advantages within its institutional businesses. During 2011 Asset Management attracted positive net flows of $25.8 billion and delivered solid investment performance to its clients.change.
Executing key strategic actionsThe Company’s capital markets rankings are reported by Thomson Reuters as of January 18, 2013 for the period of January 1, 2012 to strengthen capital and liquidity and position the Company for Basel III: Under Mr. Gorman’s leadership, the Company effected a conversion of MUFG’s Series B preferred stock to common shares, which resulted in an increase in the Company’s Tier 1 common ratio. Mr. Gorman also fulfilled a key priority through a comprehensive settlement with MBIA, which terminated outstanding credit default swap protection purchased from MBIA on commercial mortgage backed securities – thereby reducing risk-weighted assets and increasing the Company’s 2012 pro forma Tier 1 common ratio under the proposed Basel III capital framework. The Company also increased its global liquidity reserve to $182 billion at year-end.
Deepening the Company’s Strategic Alliance with MUFG: Mr. Gorman strengthened the Company’s relationship with MUFG, negotiating the conversion of MUFG’s preferred stake into common equity and enhancing the loan marketing joint venture.
Fostering Employee Engagement and Affirming Company Values: Mr. Gorman communicated with employees at all levels of the organization on a regular basis to discuss the Company’s views and strategy on a variety of business matters. Under Mr. Gorman’s leadership, the Company redoubled its commitment to expressing a cohesive vision of the Company’s values and culture to the global workforce. Mr. Gorman also completed a successful transition to Chairman of the Board of Directors upon the retirement of John Mack.
Positioning the Company’s Businesses for Regulatory Developments: Mr. Gorman continued to pursue a strategy of positioning the Company for financial regulatory developments. Mr. Gorman continued to pursue a model consistent with the legislative changes emanating from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), including reallocating capital and the balance sheet away from proprietary businesses and reinvesting in client businesses, which will help position the Company to deliver more predictable, higher-quality revenues in the new regulatory environment.
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Ms. Porat, Executive Vice President and Chief Financial Officer: The CMDS Committee evaluated Ms. Porat’s role in improving financial controls and managing related operational risk. The Committee also assessed Ms. Porat’s leadership in further enhancing the Company’s liquidity position, diversifying funding, advancing its strong capital position and driving expense management through the Office of Re-engineering. Additionally, the CMDS Committee evaluated Ms. Porat’s regular communications with investors, regulators and analysts throughout the year to explain the Company’s business initiatives and strategy.
Mr. Fleming, Executive Vice President and President of Asset Management and Global Wealth Management: The Committee considered progress made on the continuing integration of the MSSB joint venture, which is on track for completion inDecember 31, 2012. Under Mr. Fleming, the business proceeded on pace with the integration of a new technology platform for financial advisors, and increased fee-based asset flows and net new assets – both the highest since the inception of the joint venture. Within Asset Management, the CMDS Committee assessed Mr. Fleming’s role in delivering solid investment performance and increasing flows while repositioning the business around key strengths.
Mr. Kelleher, Executive Vice President and Co-President of Institutional Securities: The CMDS Committee evaluated Mr. Kelleher’s role in building a strong management team in the Sales and Trading business, as well as expanding client relationship initiatives. Additionally, the Committee considered Mr. Kelleher’s role in increasing the Company’s presence in Europe and the business’s efficient use of capital and balance sheet. Under Mr. Kelleher’s leadership, Equity Sales and Trading had a very strong year, driven by revenuewallet share gains in cash financingis based on the sum of the reported revenues for the equity sales and derivatives; Fixed Income Sales and Trading also increased revenue share (excluding DVAtrading businesses of Morgan Stanley and the impact ofcompanies within the MBIA settlement), with contributions from focus areas such as interest rates and currencies.Comparison Group, excluding Wells Fargo & Company; where applicable, the reported revenues exclude DVA.
Mr. Taubman, Executive Vice President and Co-President of Institutional Securities: The CMDS Committee considered the strong performance of the Investment Banking business under Mr. Taubman’s leadership, including gains in revenue share and continued strength of the Investment Banking franchise, as evidenced by the Company ranking #1 in global completed M&A, #2 in global IPOs, global Equity and global announced M&A in 2011.* The Company continues to be the underwriter of choice for equity and initial public offerings and has established a leading market position in acquisition finance. The Committee also considered Mr. Taubman’s leadership role in the joint venture with MUFG and his continuing efforts to strengthen client relationships.
The CMDS Committee’s compensation awards for the NEOs for 2011 are set forth in the following table. The CMDS Committee granted 2011 incentive compensation for the NEOs in a mix of PSUs, RSUs and MSCIP deferred cash-based awards that is weighted toward equity, consistent with our long-standing objective of aligning executive compensation with shareholder interests. For Mr. Gorman, 72% of the incentive compensation was delivered in equity-based awards and 28% of the incentive compensation was delivered in MSCIP awards. For each other NEO, other than Mr. Kelleher, 60% of the incentive compensation was delivered in equity-based awards and 40% of the incentive compensation was delivered in MSCIP awards. For Mr. Kelleher, as prescribed by the FSA, 50% of the incentive compensation was delivered in equity awards and 50% of the incentive compensation was delivered in MSCIP awards.
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The table below shows how the CMDS Committee viewed its compensation decisions for 2011 but is not a replacement for the disclosure required in the “2011 Summary Compensation Table.”
Mr. Gorman | Ms. Porat | Mr. Fleming | Mr. Kelleher | Mr. Taubman | ||||||||||||||||
Fixed cash compensation: | ||||||||||||||||||||
Base salary | $ | 800,000 | $ | 750,000 | $ | 750,000 | $ | 785,910 | (1) | $ | 750,000 | |||||||||
Annual incentive award: | ||||||||||||||||||||
Cash bonus | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||
Long-term incentive award:(2) | ||||||||||||||||||||
PSUs(3)(4) | $ | 1,940,000 | $ | 1,600,000 | $ | 1,700,000 | $ | 1,692,818 | $ | 1,700,000 | ||||||||||
RSUs(4)(5) | $ | 5,044,000 | $ | 3,200,000 | $ | 3,400,000 | $ | 2,539,227 | $ | 3,400,000 | ||||||||||
MSCIP award(6) | $ | 2,716,000 | $ | 3,200,000 | $ | 3,400,000 | $ | 4,232,045 | $ | 3,400,000 | ||||||||||
Total Reward: | $ | 10,500,000 | $ | 8,750,000 | $ | 9,250,000 | $ | 9,250,000 | $ | 9,250,000 |
(1) Mr. Kelleher’s base salary was £490,000 and was converted to U.S. dollars using the 2011 average of daily spot rates of £1 to $1.6039.
(2) Mr. Kelleher’s long-term incentive compensation awards differ from those granted to other NEOs as prescribed by the FSA. Among other differences described in the notes below, the long-term incentive awards granted to Mr. Kelleher include a malus provision that allows for cancellation or reduction of his award if the Company or the relevant business unit suffers a material failure of risk management.
(3) PSUs only deliver value if the Company meets specific performance goals, including ROE and relative TSR, over the three-year performance period. PSUs granted for 2011 performance are payable in, and subject to cancellation until, January 2015. These values reflect the number calculated by multiplying the target number of PSUs awarded by $18.159, the volume-weighted average price of the Company’s common stock on the grant date, January 20, 2012.
(4) The following table lists the target number of PSUs and the number of RSUs granted to each NEO:
Mr. Gorman | Ms. Porat | Mr. Fleming | Mr. Kelleher | Mr. Taubman | ||||||||||||||||
Target PSUs | 106,834.08 | 88,110.58 | 93,617.49 | 93,221.98 | 93,617.49 | |||||||||||||||
RSUs | 277,768 | 176,221 | 187,234 | 139,832 | 187,234 |
(5) With the exception of Mr. Fleming’s award, which was considered vested on February 8, 2012 (the date on which he became retirement-eligible under the award terms), the 2011 RSUs granted to the NEOs are considered vested upon grant. With the exception of Mr. Kelleher’s award, the RSUs are subject to cancellation provisions until they are scheduled to convert to shares on February 2, 2014 for 50% of the award and February 2, 2015 for the remainder of the award. Mr. Kelleher’s RSU award is scheduled to be distributed in three equal annual installments on each of February 2, 2013, 2014 and 2015, and the distributed shares will be subject to transfer restrictions for an additional six months following distribution. The number of RSUs awarded was determined by dividing the dollar value of the award by $18.159, the volume-weighted average price of the Company’s common stock on the grant date, January 20, 2012, and rounding down to the nearest whole number. Fractional shares were paid in cash to the NEOs.
(6) With the exception of Mr. Kelleher’s award, the 2011 MSCIP award is scheduled to vest and be distributed, and cancellation provisions lift, according to the following schedule: 50% on November 30, 2012 and the remaining balance on November 30, 2013. Mr. Kelleher’s 2011 MSCIP award is considered vested upon grant and is scheduled to be distributed, and cancellation provisions are scheduled to lift, according to the following schedule: 1/3 on February 2, 2013, 1/2 of the remaining balance on February 2, 2014 and the remaining balance on February 2, 2015.
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Compensation, Management Development and Succession Committee Report
We, the Compensation, Management Development and Succession Committee of the Board of Directors of Morgan Stanley, have reviewed and discussed with management the Compensation Discussion and Analysis contained in this proxy statement. Based on such review and discussions, we have recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement and incorporated by reference into the Company’s Annual Report on Form 10-K for the year ended December 31, 20112012 filed with the SEC.
Respectfully submitted,
Erskine B. Bowles, Chair
C. Robert Kidder
Donald T. Nicolaisen
Hutham S. Olayan
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20112012 Summary Compensation Table
The following table summarizes the compensation of our named executive officers in the format specified by the SEC. Our NEOs are our Chief Executive Officer, Chief Financial Officer and the three other most highly compensated executive officers as determined by their total compensation for the year ended December 31, 20112012 set forth in the table below, excluding, in accordance with SEC rules, the amount in the column captioned “Change in Pension Value and Nonqualified Deferred Compensation Earnings.”
Pursuant to SEC rules, the following table is required to include for a particular year only those stock awards and option awards grantedduring the year, rather than awards grantedafter year-end that were awarded for performance in that year. OurThrough 2012, our year-end equity awards relating to performance in a year are made shortly after year-end. Therefore, compensation in the table includes not only non-equity compensation earned for services in the applicable year but, in the case of stock awards and option awards, compensation earned for performance in prior years but granted in the years reported in the table.A summary of the CMDS Committee’s decisions on the compensation awarded to our NEOs for 20112012 performance (which, in accordance with SEC rules, are in large part not reflected in the Summary Compensation Table) can be found in the CD&A. The table also does not include the forward-looking 2013-2015 LTIP awards that were granted in January 2013.
Name and Principal Position | Year(1) | Salary ($)(2) | Bonus ($)(3) | Stock Awards ($)(4)(5) | Option Awards ($)(5) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)(6) | All Other Compensation ($)(7) | Total ($) | ||||||||||||||||||||||||
James P. Gorman | 2011 | 800,000 | 2,716,011 | 5,942,777 | 3,499,996 | 13,272 | 9,800 | 12,981,856 | ||||||||||||||||||||||||
President and Chief | 2010 | 800,000 | 3,880,000 | 10,167,949 | — | 331,688 | 6,100 | 15,185,737 | ||||||||||||||||||||||||
Executive Officer
| 2009 | 734,247 | 5,706,301 | — | — | 49,372 | 6,100 | 6,496,020 | ||||||||||||||||||||||||
Ruth Porat | 2011 | 750,000 | 3,200,003 | 5,667,083 | 1,499,993 | 265,285 | 14,927 | 11,397,291 | ||||||||||||||||||||||||
Executive Vice President and Chief Financial Officer
| 2010 | 750,000 | 3,700,000 | 6,911,340 | — | 342,985 | 6,100 | 11,710,425 | ||||||||||||||||||||||||
Gregory J. Fleming* | 2011 | 750,000 | 3,400,018 | 5,360,760 | 499,992 | — | — | 10,010,770 | ||||||||||||||||||||||||
Executive Vice President and President of Asset Management and Global Wealth Management
| 2010 | 673,558 | (8) | 3,500,000 | 9,000,000 | — | — | 75,000 | 13,248,558 | |||||||||||||||||||||||
Colm Kelleher | 2011 | 785,910 | (9) | 4,232,063 | 6,275,274 | 1,499,993 | 257,217 | 754,852 | 13,805,309 | |||||||||||||||||||||||
Executive Vice President and Co-President of Institutional Securities
| 2010 | 757,316 | 4,097,074 | 6,737,046 | — | 539,527 | 1,231,667 | 13,362,630 | ||||||||||||||||||||||||
2009 | 628,476 | 6,400,365 | — | — | 56,821 | 2,411,959 | 9,497,621 | |||||||||||||||||||||||||
Paul J. Taubman | 2011 | 750,000 | 3,400,018 | 6,279,760 | 1,499,993 | 686,726 | 13,116 | 12,629,613 | ||||||||||||||||||||||||
Executive Vice President and Co-President of Institutional Securities |
Name and Principal Position | Year(1) | Salary ($)(2) | Bonus ($)(3) | Stock Awards ($)(4)(5) | Option Awards ($)(5) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)(6) | All Other Compensation ($)(7) | Total ($) | ||||||||||||||||||||||||
James P. Gorman | 2012 | 800,000 | 2,575,000 | 6,984,208 | — | 292,454 | 20,552 | 10,672,214 | ||||||||||||||||||||||||
Chairman and | 2011 | 800,000 | 2,716,011 | 5,942,777 | 3,499,996 | 13,272 | 9,800 | 12,981,856 | ||||||||||||||||||||||||
Chief Executive Officer | 2010 | 800,000 | 3,880,000 | 10,167,949 | — | 331,688 | 6,100 | 15,185,737 | ||||||||||||||||||||||||
Ruth Porat | 2012 | 750,000 | 2,250,000 | 4,800,178 | — | 278,030 | 15,497 | 8,093,705 | ||||||||||||||||||||||||
Executive Vice President and Chief Financial Officer |
| 2011 2010 |
|
| 750,000 750,000 |
|
| 3,200,003 3,700,000 |
|
| 5,667,083 6,911,340 |
|
| 1,499,993 — |
|
| 265,285 342,985 |
|
| 14,927 6,100 |
|
| 11,397,291 11,710,425 |
| ||||||||
Gregory J. Fleming | 2012 | 750,000 | 2,425,000 | 5,100,174 | — | — | — | 8,275,174 | ||||||||||||||||||||||||
Executive Vice President and President of Global Wealth Management Group and Asset Management |
| 2011 2010 |
|
| 750,000 673,558 |
|
| 3,400,018 3,500,000 |
|
| 5,360,760 9,000,000 |
|
| 499,992 — |
|
| — — |
|
| — 75,000 |
|
| 10,010,770 13,248,558 |
| ||||||||
Colm Kelleher* | 2012 | 776,661 | (8) | 2,411,670 | 4,232,218 | — | 576,399 | 279,045 | 8,275,993 | |||||||||||||||||||||||
Executive Vice President and Co-President of Institutional Securities | | 2011 2010 | | | 785,910 757,316 | | | 4,232,063 4,097,074 | | | 6,275,274 6,737,046 | | | 1,499,993 — | | | 257,217 539,527 | | | 754,852 1,231,667 | | | 13,805,309 13,362,630 | | ||||||||
Paul J. Taubman | 2012 | 750,000 | 2,425,000 | 5,100,174 | — | 1,636,703 | 13,575 | 9,925,452 | ||||||||||||||||||||||||
Executive Vice President and Co-President of Institutional Securities | 2011 | 750,000 | 3,400,018 | 6,279,760 | 1,499,993 | 686,726 | 13,116 | 12,629,613 |
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* Effective January 13, 2011,1, 2013, Mr. FlemingKelleher became President of the Global Wealth Management Group in addition to his being Executive Vice President and President of Asset Management.Institutional Securities.
(1)For Ms. Porat and Mr. Fleming, compensation is not shown for 2009 because they were not executive officers during that period. For Mr. Taubman, compensation is not shown for 2009 or 2010 because he was not an executive officer in 2009 and he was not a NEO in 2010.
(2)Includes elective deferrals to the Company’s employee benefit plans.
(3) The NEOs received no annualimmediately payable cash bonus for 2011.2012. For 2011,2012, represents deferred cash amounts awarded in January 20122013 under MSCIP for performance in 2011 and cash paid in January 2012 in lieu of a grant of a fractional RSU (with such cash payment equal to: $11 for Mr. Gorman; $3 for Ms. Porat; and $18 for each of Messrs. Fleming, Kelleher and Taubman).2012. With the exception of Mr.Messrs. Kelleher’s award,and Taubman’s awards, the 20112012 MSCIP awards are scheduled to vest and be distributed 25% on May 31, 2013, one-third of the remaining balance on November 30, 2013, 50% of the remaining balance on November 30, 2014, and the remaining balance on November 30, 2015. Mr. Kelleher’s 2012 MSCIP award is scheduled to vest and be distributed according to the following schedule: one-third on January 27, 2014, 50% of the remaining balance on November 30, 2012January 26, 2015 and the remaining balance on November 30, 2013.January 25, 2016. Mr. Kelleher’s 2011Taubman’s 2012 MSCIP award is scheduled to vest upon his termination of employment and be distributed according to the following schedule: 1/3in four installments on February 2,June 1, 2013, 1/2 of the remaining balance on February 2,
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December 15, 2013, June 1, 2014 and the remaining balance on February 2, 2015. 2011December 15, 2014 in accordance with his Separation Agreement. 2012 MSCIP awards are subject to cancellation and clawback. For further details on MSCIP awards, see the CD&A.
(4) For 2011,2012, consists of RSUs granted on January 21, 201120, 2012 for performance in 20102011 and PSUs granted on January 21, 201120, 2012 for performance in 20102011 that are subject to satisfaction of predetermined performance goals over a three-year performance period.period (2012-2014).
(5)Represents aggregate grant date fair value of awards granted during the applicable period determined in accordance with the applicable accounting guidance for equity-based awards. Therefore, values disclosed in the table include the values of awards granted during the applicable period for the prior year’s service. NEOs do not realize the value of equity-based awards until the awards are settled or exercised. The actual value that a NEO will realize from these awards is determined by future Company performance and share price, and may be higher or lower than the amounts indicated in the table.
The following table lists the aggregate grant date fair value of stock unit awards granted to the NEOs during 2011.2012. The aggregate grant date fair value of RSUs included in the table is based on the volume-weighted average price of the common stock on the grant date, as determined in accordance with applicable accounting guidance for equity-based awards. The aggregate grant date fair value of PSUs included in the table is based on the probable outcome of the performance conditions as of the grant date, consistent with the estimate of aggregate compensation cost to be recognized over the service period determined as of the grant date under the applicable accounting guidance for equity-based awards. The value of the PSUs on the grant date based on the volume-weighted average price of the common stock on the grant date and assuming that the highest level of performance conditions will be achieved is $3,880,000$2,910,000 for Mr. Gorman; $3,700,000$2,400,000 for Ms. Porat; $3,500,000$2,550,000 for Mr. Fleming; $4,097,073$2,539,227 for Mr. Kelleher; and $4,100,000$2,550,000 for Mr. Taubman.
Stock Unit Awards Granted During 2011 for Performance in 2010 ($) | Stock Unit Awards Granted During 2012 for Performance in 2011 ($) | |||||||||||
Name | RSUs | PSUs | Total | RSUs | PSUs | Total | ||||||
James P. Gorman | 3,879,978 | 2,062,799 | 5,942,777 | 5,043,989 | 1,940,219 | 6,984,208 | ||||||
Ruth Porat | 3,699,981 | 1,967,102 | 5,667,083 | 3,199,997 | 1,600,181 | 4,800,178 | ||||||
Gregory J. Fleming | 3,499,988 | 1,860,772 | 5,360,760 | 3,399,982 | 1,700,192 | 5,100,174 | ||||||
Colm Kelleher | 4,097,068 | 2,178,206 | 6,275,274 | 2,539,209 | 1,693,009 | 4,232,218 | ||||||
Paul J. Taubman | 4,099,998 | 2,179,762 | 6,279,760 | 3,399,982 | 1,700,192 | 5,100,174 |
The aggregate grant date fair value of the stock options granted to the NEOs during 2011 is based on the Black-Scholes value of a stock option on the grant date, as determined in accordance with applicable accounting guidance for equity-based awards. For further information on the valuation of the Company’s RSUs, PSUs and stock options, see notes 2 and 20 to the consolidated financial statements included in the 2011 Form 10-K.
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(6) The following table lists the change in pension value and the amount of any above-market earnings on nonqualified deferred compensation plans for the NEOs for 2011.2012.
Name | 2011 Change in Pension Value ($)(a) | 2011 Above-Market Earnings on ($)(b) | Total ($) | 2012 Change in Pension Value ($)(a) | 2012 Above-Market Earnings on Nonqualified Deferred Compensation ($)(b) | Total ($) | ||||||
James P. Gorman | 13,272 | — | 13,272 | 10,444 | 282,010 | 292,454 | ||||||
Ruth Porat | 244,678 | 20,607 | 265,285 | 270,536 | 7,494 | 278,030 | ||||||
Gregory J. Fleming | — | — | — | — | — | — | ||||||
Colm Kelleher | 257,217 | — | 257,217 | 141,915 | 434,484 | 576,399 | ||||||
Paul J. Taubman | 673,936 | 12,790 | 686,726 | 920,410 | 716,293 | 1,636,703 |
(a) | The |
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generational annuitant mortality tables and discount rates of 4.08% for the ERP, 3.75% for the Excess Plan component and 3.65% for the SERP component of the SEREP. The present values at December 31, 2011 are based on Pension Protection Act (PPA) generational annuitant mortality tables and discount rates of 4.65% for the ERP, 4.66% for the Excess Plan component and 4.54% for the SERP component of the SEREP. |
(b) | The “Above-Market Earnings on Nonqualified Deferred Compensation” for |
(7)The “All Other Compensation” column for 20112012 includes (a) contributions made by the Company under our qualified defined contribution plans with respect to such period and (b) perquisites and other personal benefits, as detailed below. Perquisites are valued based on the aggregate incremental cost to the Company. Any of the perquisites and other personal benefits listed below but not separately quantified do not individually exceed the greater of $25,000 or 10% of the total amount of all perquisites received by the NEO. In addition, our NEOs may participate on the same terms and conditions as other investors in investment funds that we may form and manage primarily for client investment, except that we may waive or lower applicable fees and charges for our employees.
(a) |
|
(b) |
|
41
|
(8)Mr. Fleming’s annualized base salary of $750,000 for 2010 was prorated for service from February 8, 2010, his employment commencement date, in accordance with his employment offer letter with the Company, dated February 3, 2010.
(9)Mr. Kelleher’s base salary was £490,000 for 2011.2012. The amount of British pounds sterling was converted to U.S. dollars using the 20112012 average of daily spot rates of £1 to $1.6039.$1.5850. Mr. Kelleher’s base salary was also £490,000 for 20102011 and 2009.2010. Differences in base salary reported in the table are due to currency fluctuations.
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20112012 Grants of Plan-Based Awards Table(1)
The following table sets forth information with respect to the RSUs PSUs and stock optionsPSUs granted to the NEOs in January 20112012 for 20102011 performance. The table does not include equity awards granted to our NEOs in January 20122013 for annual performance in 2011.2012 or for forward-looking performance beginning with 2013.
Name | Grant Date (mm/dd/ | Estimated Future Payouts Under Equity Incentive Plan Awards(2) | All Other Stock Awards: Number of Shares of Stock or Units (#)(3) | All Other Awards: Securities Underlying Options (#)(4) | Exercise or Base Price of Option Awards ($/Sh)(5) | Grant Date Value of and Awards ($)(6) | Grant Date (mm/dd/ | Estimated Future Payouts Under Equity Incentive Plan Awards(2) | All Other Stock Awards: Number of Shares of Stock or Units (#)(3) | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise or Base Price of Option Awards ($/Sh) | Grant Date Value of and Awards ($)(4) | ||||||||||||||||||||
Threshold (#) | Target (#) | Maximum (#) | Threshold (#) | Target (#) | Maximum (#) | |||||||||||||||||||||||||||
James P. Gorman | 1/21/2011 | 0 | 64,904.87 | 129,809.74 | — | — | — | 2,062,799 | 1/20/2012 | 0 | 106,834.08 | 160,251.12 | — | — | — | 1,940,219 | ||||||||||||||||
1/21/2011 | — | — | — | 129,809 | — | — | 3,879,978 | 1/20/2012
| — | — | — | 277,768 | — | — | 5,043,989 | |||||||||||||||||
1/21/2011
| — | — | — | — | 424,731 | 30.01 | 3,499,996 | |||||||||||||||||||||||||
Ruth Porat | 1/21/2011 | 0 | 61,893.82 | 123,787.64 | — | — | — | 1,967,102 | 1/20/2012 | 0 | 88,110.58 | 132,165.87 | — | — | — | 1,600,181 | ||||||||||||||||
1/21/2011 | — | — | — | 123,787 | — | — | 3,699,981 | |||||||||||||||||||||||||
1/21/2011
| — | — | — | — | 182,027 | 30.01 | 1,499,993 | 1/20/2012
| — | — | — | 176,221 | 3,199,997 | |||||||||||||||||||
Gregory J. Fleming | 1/21/2011 | 0 | 58,548.21 | 117,096.42 | — | — | — | 1,860,772 | 1/20/2012 | 0 | 93,617.49 | 140,426.24 | — | — | — | 1,700,192 | ||||||||||||||||
1/21/2011 | — | — | — | 117,096 | — | — | 3,499,988 | 1/20/2012
| — | — | — | 187,234 | — | — | 3,399,982 | |||||||||||||||||
1/21/2011
| — | — | — | — | 60,675 | 30.01 | 499,992 | |||||||||||||||||||||||||
Colm Kelleher | 1/21/2011 | 0 | 68,536.08 | 137,072.16 | — | — | — | 2,178,206 | 1/20/2012 | 0 | 93,221.98 | 139,832.97 | — | — | — | 1,693,009 | ||||||||||||||||
1/21/2011 | — | — | — | 137,072 | — | — | 4,097,068 | |||||||||||||||||||||||||
1/21/2011
| — | — | — | — | 182,027 | 30.01 | 1,499,993 | 1/20/2012
| — | — | — | 139,832 | — | — | 2,539,209 | |||||||||||||||||
Paul J. Taubman | 1/21/2011 | 0 | 68,585.04 | 137,170.08 | — | — | — | 2,179,762 | 1/20/2012 | 0 | 93,617.49 | 140,426.24 | — | — | — | 1,700,192 | ||||||||||||||||
1/21/2011 | — | — | — | 137,170 | — | — | 4,099,998 | 1/20/2012
| — | — | — | 187,234 | — | — | 3,399,982 | |||||||||||||||||
1/21/2011
| — | — | — | — | 182,027 | 30.01 | 1,499,993 |
(1)The PSU awards included in this table are also disclosed in the “Stock Awards” column of the “2011“2012 Summary Compensation Table” and the “2011“2012 Outstanding Equity Awards at Fiscal Year-End Table.” The RSU awards included in this table are also disclosed in the “Stock Awards” column of the “2011“2012 Summary Compensation Table” and, except with respect to Mr. Fleming,Table,” the “2011“2012 Option Exercises and Stock Vested Table” and the “2011“2012 Nonqualified Deferred Compensation Table.” With respect to Mr. Fleming, the RSU award included in this table is also disclosed in the “2011 Outstanding Equity Awards at Fiscal Year-End Table.” The stock option awards included in this table are also disclosed in the “Option Awards” column of the “2011 Summary Compensation Table” and the “2011 Outstanding Equity Awards at Fiscal Year-End Table.” The PSUs and RSUs were granted under the Morgan Stanley 2007 Equity Incentive Compensation Plan. The stock options were granted under the Morgan Stanley Employees’ Equity Accumulation Plan.
(2)The PSUs are scheduled to vest and convert to shares in 20142015 only if the Company satisfies predetermined performance goals over the three-year performance period that began on January 1, 20112012 and ends on
42
December 31, 2013.2014. One-half of the target PSU award will be based on the Company’s ROE over the three-year performance period. The other half of the award will be based on the Company’s TSR relative to the TSR of the members of the Comparison Group (Bank of America Corp., Barclays Plc, Citigroup Inc., Credit Suisse Group, Deutsche Bank AG, Goldman Sachs Group Inc., JPMorgan Chase & Co., UBS AG and Wells Fargo & Company)S&P Financial Sectors Index (Index Group) over the three-year period.
The number of “at-risk” PSUs ultimately earned will be determined by multiplying one-half of the target award by the multipliers according to the following grids:
MS ROE* | Multiplier | |
18% or more | 2.00 | |
12% | 1.00 | |
less than 7.5% | 0.00 |
MS ROE* | Multiplier | |
12% or more | 1.5 | |
10% | 1.00 | |
6% | 0.5 | |
less than 6% | 0.00 |
* | ROE, for this purpose, excludes (a) the impact of DVA, (b) gains or losses associated with the sale of specified businesses, (c) specified goodwill impairments, (d) any gains or loss, including accruals, associated with specified legal settlements relating to business activities conducted prior to January 1, 2011, and (e) specified cumulative catch-up adjustments resulting from changes in accounting principles that are not applied on a full retrospective basis. If ROE is between two of the thresholds noted above, the number of PSUs earned will be determined by straight-line interpolation between the two thresholds. |
MS TSR Rank* | Multiplier | |
1 | 2.00 | |
5 | 1.00 | |
9 or 10 | 0.00 |
MS TSR vs. Index Group TSR* | Multiplier | |
Above | Up to 1.5 | |
Equal | 1.00 | |
Below | Down to 0.00 |
* |
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Each NEO is entitled to receive cash dividend equivalents on the PSUs, subject to the same vesting, cancellation and payment provisions as the underlying PSUs. NEOs may not direct the vote of the shares underlying the PSUs. The PSUs are subject to cancellation if a cancellation event occurs at any time prior to the scheduled conversion date. If, after payment of the PSUs, the CMDS Committee determines that the performance certified by the CMDS Committee was based on materially inaccurate financial statements or other performance metric criteria, then such number of shares (or cash equivalent if the shares were transferred) shall be subject to clawback by the Company. For further details on cancellation of awards, see “Potential Payments Uponupon Termination or Change-in-Control.”
(3)The RSUs are scheduled to convert to shares according to the following schedule: 50% on February 2, 2013 andexcept with respect to Mr. Kelleher, 50% on February 2, 2014 and 50% on February 2, 2015 and for Mr. Kelleher, three equal installments on February 2nd of each of 2013, 2014 and 2015. Each NEO other than Mr. Fleming is retirement-eligible under the award terms at grant and, therefore, the awards are considered vested at grant. Mr. Fleming isbecame retirement-eligible under the award terms on February 8, 2012 and, therefore, the awards are considered vested as of February 8, 2012.such date. All RSUs are subject to cancellation if a cancellation event occurs at any time prior to the scheduled conversion date. For further details on cancellation of awards, see “Potential Payments Uponupon Termination or Change-in-Control.” Each NEO is entitled to receive cash dividend equivalents onin the form of additional RSUs, subject to the same vesting, cancellation and payment provisions as the underlying RSUs, and may direct the vote of the shares underlying the RSUs. Effective as of January 1, 2012, in lieu of cash dividend equivalents, the NEOs will receive dividend equivalents in the form of additional RSUs, subject to the same vesting, cancellation and payment provisions as the underlying RSUs.
(4)The stock options become exercisable in three equal annual installments on each of February 2, 2012, 2013 and 2014 and expire on the seventh anniversary of grant. Each NEO other than Mr. Fleming is retirement-eligible under the award terms as of the anniversary of the grant date and, therefore, the awards were considered vested on such date. Mr. Fleming is retirement-eligible under the award terms as of February 8, 2012. All stock options are subject to cancellation if a cancellation event occurs at any time prior to the scheduled exercisability date. For further details on cancellation of awards, see “Potential Payments Upon Termination or Change-in-Control.”
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(5)The stock options were granted with an exercise price equal to $30.01, the closing price of the Company’s common stock on the grant date.
(6)Represents the aggregate grant date fair value, in accordance with the applicable accounting guidance for equity-based awards, of the RSUs PSUs and stock options.PSUs. The aggregate grant date fair value of the RSUs granted on January 21, 201120, 2012 is based on $29.8899,$18.159, the volume-weighted average price of the common stock on the grant date. The aggregate grant date fair value of the stock options granted on January 21, 2011 is based on the Black-Scholes value of a stock option on the grant date, as determined in accordance with applicable accounting guidance for equity-based awards. The aggregate grant date fair value of PSUs is based on the probable outcome of the performance conditions as of January 21, 2011,20, 2012, consistent with the estimate of aggregate compensation cost to be recognized over the service period determined as of such date under the applicable accounting guidance for equity-based awards. NEOs do not realize the value of equity-based awards until the awards are settled or exercised. The actual value that a NEO will realize from these awards is determined by future Company performance and share price, and may be higher or lower than the amounts indicated in the table. In particular, with respect to the PSUs, a NEO may ultimately earn up to twoone and a half times the target number of units (maximum), or nothing (threshold), based on the Company’s performance over the three-year performance period. Based on the Company’s actual performance through December 31, 2011,2012, a NEO would have earned only 12.5%46.4% of the target number of units. For further information on the valuation of the Company’s RSUs PSUs and stock options,PSUs, see notes 2 and 20 to the consolidated financial statements included in the 20112012 Form 10-K.
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20112012 Outstanding Equity Awards at Fiscal Year-End Table
The following table discloses the number of shares covered by unexercised stock options and unvested RSUs and PSUs held by our NEOs on December 31, 2011. With the exception of Mr. Fleming, as2012. As of December 31, 2011,2012, each NEO is retirement-eligible under his or her RSU award terms and, therefore, all of his or her outstanding RSU awards are considered vested and, in accordance with SEC rules, are not included in this table. Outstanding vested RSUs held by the NEOs on December 31, 20112012 are disclosed in the “2011“2012 Nonqualified Deferred Compensation Table.”As of December 31, 2011,2012, the stock options held by the NEOs had no intrinsic value because the exercise price of each stock option was greater than $15.13,$19.12, the closing price of the Company’s common stock on December 30, 2011.31, 2012.
Option Awards | Stock Awards | Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Name | Name | Number of Exercisable(1)(2) | Number of Unexercisable | Option Exercise Price ($)(2) | Option (mm/dd/ yyyy) | Number of Shares or Units of Stock That Have Not Vested (#)(3) | Market Value of Shares or Units of Stock That Have Not Vested ($)(3) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)(4) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)(4) | Name | Number of Exercisable (#)(1)(2) | Number of Unexercisable (#)(1) | Option Exercise Price ($)(2) | Option (mm/dd/ yyyy) | Number of Shares or Units of Stock That Have Not Vested (#)(3) | Market Value of Shares or Units of Stock That Have Not Vested ($)(3) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)(4) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)(4) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
James P. Gorman | James P. Gorman | 354,986 | — | 51.7552 | 2/17/2016 | — | — | 162,200.34 | 2,454,091 | James P. Gorman |
| 354,986 | — | 51.7552 | 2/17/2016 | 0 | 0 | 106,834.08 | 2,042,668 | |||||||||||||||||||||||||||||||||||||||||||||||||||
56,772 | — | 66.7260 | 12/12/2016 | 56,772 | — | 66.7260 | 12/12/2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
— | 424,731 | 30.0100 | 1/21/2018 | 141,575 | 283,156 | 30.0100 | 1/21/2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total
| 411,758 | 424,731 | 162,200.34 | 2,454,091 | Total | 553,333 | 283,156 | 0 | 0 | 106,834.08 | 2,042,668 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ruth Porat | Ruth Porat | 13,466 | — | 48.5345 | 1/2/2012 | — | — | 144,354.74 | 2,184,087 | 11,699 | — | 36.2209 | 1/2/2013 | 0 | 0 | 88,110.58 | 1,684,674 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
11,699 | — | 36.2209 | 1/2/2013 | 19,746 | — | 47.1909 | 1/2/2014 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
19,746 | — | 47.1909 | 1/2/2014 | 23,737 | — | 66.7260 | 12/12/2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
23,737 | — | 66.7260 | 12/12/2016 | 60,675 | 121,352 | 30.0100 | 1/21/2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
— | 182,027 | 30.0100 | 1/21/2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 115,857 | 121,352 | 0 | 0 | 88,110.58 | 1,684,674 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gregory J. Fleming | Gregory J. Fleming |
| 20,224 | 40,451 | 30.0100 | 1/21/2018 | 0 | 0 | 93,617.49 | 1,789,966 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total
| 68,648 | 182,027 | — | — | 144,354.74 | 2,184,087 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gregory J. Fleming
| — | 60,675 | 30.0100 | 1/21/2018 | 340,590 | 5,153,127 | 58,548.21 | 885,834 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 20,224 | 40,451 | 0 | 0 | 93,617.49 | 1,789,966 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Colm Kelleher | Colm Kelleher | 22,775 | — | 36.2209 | 12/2/2012 | — | — | 149,057.08 | 2,255,234 | Colm Kelleher |
| 40,201 | — | 47.1909 | 12/2/2013 | 0 | 0 | 93,221.98 | 1,782,404 | |||||||||||||||||||||||||||||||||||||||||||||||||||
40,201 | — | 47.1909 | 12/2/2013 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
144,551 | — | 66.7260 | 12/12/2016 | 144,551 | — | 66.7260 | 12/12/2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
— | 182,027 | 30.0100 | 1/21/2018 | 60,675 | 121,352 | 30.0100 | 1/21/2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total
| 207,527 | 182,027 | — | — | 149,057.08 | 2,255,234 | Total | 245,427 | 121,352 | 0 | 0 | 93,221.98 | 1,782,404 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Paul J. Taubman | Paul J. Taubman | 47,686 | — | 48.5345 | 1/2/2012 | — | — | 167,244.55 | 2,530,410 | Paul J. Taubman |
| 56,941 | — | 36.2209 | 1/2/2013 | 0 | 0 | 93,617.49 | 1,789,966 | |||||||||||||||||||||||||||||||||||||||||||||||||||
56,941 | — | 36.2209 | 1/2/2013 | 65,160 | — | 47.1909 | 1/2/2014 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
65,160 | — | 47.1909 | 1/2/2014 | 116,371 | — | 66.7260 | 12/12/2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
116,371 | — | 66.7260 | 12/12/2016 | 60,675 | 121,352 | 30.0100 | 1/21/2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
— | 182,027 | 30.0100 | 1/21/2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 299,147 | 121,352 | 0 | 0 | 93,617.49 | 1,789,966 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 286,158 | 182,027 | — | — | 167,244.55 | 2,530,410 |
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(1) The stock option awards in this table vested and are exercisable, or will vest and become exercisable, in accordance with the chart below. Although each NEO is considered retirement-eligible under the terms of his or her stock options with an expiration date of January 21, 2018, and therefore such options are considered vested, such options do not become exercisable until the applicable scheduled vesting date as follows:described below:
Option (mm/dd/yyyy) | Vesting Schedule | |
1/2/ |
| |
|
| |
| 100% of the award became exercisable on 1/2/2005. The shares acquired upon exercise were subject to cancellation and transfer restrictions until 1/2/2008.
| |
12/2/2013 | 50% of the award became exercisable on 1/2/2006 and 50% of the award became exercisable on 1/2/2007. The shares acquired upon exercise were subject to cancellation and transfer restrictions until 1/2/2009.
| |
1/2/2014 | 50% of the award became exercisable on 1/2/2006 and 50% of the award became exercisable on 1/2/2007. The shares acquired upon exercise were subject to cancellation and transfer restrictions until 1/2/2009.
| |
2/17/2016 | 60% of the award became exercisable on 2/17/2006 and 40% of the award became exercisable on 2/16/2007.
| |
12/12/2016 | 50% of the award became exercisable on 1/2/2009 and 50% of the award became exercisable on 1/2/2010. The shares acquired upon exercise were subject to cancellation and transfer restrictions until 1/2/2010.
| |
1/21/2018 |
|
(2)Stock options were granted with an exercise price equal to the fair market value of the Company’s common stock on the date of grant and, with the exception of the stock options that are scheduled to expire on January 21, 2018, were subsequently equitably adjusted to reflect the spin-off of Discover Financial Services in 2007.
(3)Mr. Fleming is retirement-eligible underReflects PSUs granted in connection with 2009 compensation, with respect to which the award terms asNEO was eligible to receive up to two times the target number of February 8,units, or nothing, based on the Company’s performance over the performance period consisting of 2010, 2011 and 2012. Based on Company performance through December 31, 2012, and, therefore, the awards are considered vested as of that date. The RSUs set forth in the table for Mr. Fleming are scheduled to convert to shares as follows: 110,079 on February 8, 2012; 113,415 on February 8, 2013; and 58,548 on each of February 2, 2013 and February 2, 2014. The market valueNEOs did not earn any portion of the RSUs is based on $15.13, the closing price of the Company’s common stock on December 30, 2011.PSUs and as a result, such awards were subsequently cancelled.
(4)TheBased on Company performance through December 31, 2012, the number of PSUs reflectsreflected in the grant oftable represents the target number of units, althoughPSUs granted in connection with 2011 compensation (2011 PSUs) and reflects the senior executivethreshold number of PSUs, or zero, granted in connection with 2010 compensation (2010 PSUs). With respect to the 2011 PSUs and the 2010 PSUs, the NEOs may ultimately earn up to two1.5 times or 2 times, respectively, the target number of units, or nothing, based on the Company’s performance over the applicable three-year performance period. The 2011 PSUs includedare scheduled to vest and convert to shares in this table were granted2015, only if the Company satisfies predetermined performance goals over the three-year performance period consisting of 2012, 2013 and 2014 (see note 2 to the NEOs for performance in 2009 (with the number“2012 Grants of 2009 PSUs granted to each NEO as follows: 97,295.47 to Mr. Gorman; 82,460.92 to Ms. Porat; 80,521 to Mr. Kelleher; and 98,659.51 to Mr. Taubman) and 2010 (with thePlan-Based Awards Table”). The target number of 2010 PSUs granted to each NEO as follows:were: 64,904.87 to Mr. Gorman; 61,893.82 to Ms. Porat; 58,548.21 to Mr. Fleming; 68,536.08 to Mr. Kelleher; and 68,585.04 to Mr. Taubman) andTaubman. The 2010 PSUs are scheduled to vest and convert to shares in 2013 and 2014 respectively, only if the Company satisfies predetermined performance goals over the applicable three-year performance period (see footnote 2consisting of 2011, 2012 and 2013. Based on Company performance through December 31, 2012, the NEOs would not be entitled to earn any portion of the “2011 Grants of Plan-Based Awards Table”).2010 PSUs; however, a portion may still be earned based on 2013 performance. The market value of the PSUs is based on $15.13,$19.12, the closing price of the Company’s common stock on December 30, 2011.31, 2012.
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20112012 Option Exercises and Stock Vested Table
The following table contains information about RSUs held by the applicable NEOs that vested during 2011. With the exception of Mr. Fleming’s award, these2012. These RSUs are also disclosed in the “Stock Awards” column of the “2011“2012 Summary Compensation Table,” the “2011“2012 Grants of Plan-Based Awards Table” and the “2011“2012 Nonqualified Deferred Compensation Table.” The table does not include PSUs granted in January 20112012 for 20102011 performance because the vesting of such awards is subject to the Company’s satisfaction of predetermined performance goals over a three-year performance period.
Option Awards | Stock Awards | Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||
Name | Number of Shares Acquired (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#)(1) | Value Realized on Vesting ($)(2) | Number of Shares Acquired (#) | Value Realized on Exercise ($) | Number of Shares Acquired On Vesting (#)(1) | Value Realized on Vesting ($)(2) | ||||||||||||||||||||||||||||
James P. Gorman
| — | — | 129,809 | $ | 3,879,978 | — | — | 277,768 | 5,043,989 | |||||||||||||||||||||||||||
Ruth Porat
| — | — | 123,787 | $ | 3,699,981 | — | — | 176,221 | 3,199,997 | |||||||||||||||||||||||||||
Gregory J. Fleming
| — | — | 110,079 | $ | 3,290,250 | — | — | 528,961.87 | (3) | 10,721,105 | (3) | |||||||||||||||||||||||||
Colm Kelleher
| — | — | 137,072 | $ | 4,097,068 | — | — | 139,832 | 2,539,209 | |||||||||||||||||||||||||||
Paul J. Taubman | — | — | 137,170 | $ | 4,099,998 | — | — | 187,234 | 3,399,982 |
(1)Other than with respect to Mr. Fleming, consists of RSUs that were granted on January 21,20, 2012 for 2011 for 2010 performance. For further details on these RSUs, including the terms of the deferral, see note 3 to the “2011“2012 Grants of Plan-Based Awards Table.” With respect to Mr. Fleming, consists of RSUs that were granted on February 8, 2010, in accordance with his employment offer letter with the Company, that vested in accordance with their terms on February 8, 2011.
(2) TheExcept as noted below with respect to Mr. Fleming, the value realized represents the aggregate grant date fair value, in accordance with the applicable accounting guidance for equity-based awards, of the RSUs. The aggregate grant date fair value of the RSUs is based on $29.8899,$18.159, the volume-weighted average price of the common stock on the grant date ordate.
(3) With respect to Mr. Fleming, consists of the following RSU awards that became vested pursuant to their terms on February 8, 2012 when Mr. Fleming became retirement-eligible: (i) RSUs granted on January 20, 2012 for 2011 performance, (ii) RSUs granted on January 21, 2011 for 2010 performance and (iii) RSUs granted on February 8, 2010 in accordance with his employment offer letter with the Company. Pursuant to the terms of the RSUs described in clause (iii), 110,079 RSUs that vested on February 8, 2012 also converted to shares of common stock on such date. The value of the RSUs is based on $20.2682, the volume-weighted average price of the common stock on February 8, 2012, the vesting date as applicable.of the awards.
20112012 Pension Benefits Table
The table below discloses the present value of accumulated benefits payable to each of the NEOsNEO and the years of service credited to each NEO under the Company’s defined benefit retirement plans as of December 31, 2011.2012.
Name | Plan Name(1) | Number of Years Credited Service | Retirement Age for Full Benefits | Present Value of Accumulated Benefit ($)(2) | Payments During Last Fiscal Year ($) | Plan Name(1) | Number of Years Credited Service | Retirement Age for Full Benefits | Present Value of Accumulated Benefit ($)(2) | Payments During Last Fiscal Year ($) | ||||||||||||||||||||||||||
James P. Gorman
| Morgan Stanley Employees Retirement Plan | 4 | 65 | 62,511 | — | Morgan Stanley Employees Retirement Plan | 4 | 65 | 72,955 | 0.00 | ||||||||||||||||||||||||||
Ruth Porat | Morgan Stanley Employees Retirement Plan | 20 | 65 | 343,622 | — | Morgan Stanley Employees Retirement Plan | 20 | 65 | 400,790 | 0.00 | ||||||||||||||||||||||||||
Morgan Stanley Supplemental Executive Retirement and Excess Plan
| 22
| 60
| 1,124,620
| —
| Morgan Stanley Supplemental Executive Retirement and Excess Plan
| 23 | 60 | 1,337,987 | 0.00 | |||||||||||||||||||||||||||
Gregory J. Fleming(3)
| — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
Colm Kelleher | Morgan Stanley U.K. Group Pension Plan(4) | 7 | 60 | 132,851 | — | Morgan Stanley U.K. Group Pension Plan(4) | 7 | 60 | 169,672 | 0.00 | ||||||||||||||||||||||||||
Morgan Stanley Supplemental Executive Retirement and Excess Plan
| 22
| 60
| 866,211
| —
| Morgan Stanley Supplemental Executive Retirement and Excess Plan
| 23 | 60 | 1,008,126 | 0.00 | |||||||||||||||||||||||||||
Paul J. Taubman | Morgan Stanley Employees Retirement Plan | 25 | 65 | 371,185 | — | Morgan Stanley Employees Retirement Plan | 25 | 65 | 439,296 | 0.00 | ||||||||||||||||||||||||||
Morgan Stanley Supplemental Executive Retirement and Excess Plan | 26 | 60 | 1,310,058 | — | Morgan Stanley Supplemental Executive Retirement and Excess Plan | 27 | 60 | 2,162,348 | 0.00 |
(1) Benefits under the SEREP are shown even if the eligibility requirements (i.e., grandfathered group, age 55, five years of service, and age plus service totals at least 65) have not been met as of the current date. See the discussion under “Supplemental Executive Retirement and Excess Plan” following this table.
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(2)The present value at December 31, 20112012 is based on PPA generational annuitant mortality tables and discount rates of 4.65%4.08% for the ERP, 4.66%3.75% for the Excess Plan component and 4.54%3.65% for the SERP component of the SEREP. Present values are determined using an interest-only discount before retirement. Post-retirement discounts are based on interest and mortality. The assumed benefit commencement date is the earliest age at which the executive can receive unreduced benefits or current age, if greater.
(3) Mr. Fleming is not eligible for any of the Company-sponsored defined benefit plans.
(4)During 2012, Mr. Kelleher participatesparticipated in the Morgan Stanley U.K. Group Pension Plan (U.K. Pension Plan), a defined contribution plan that provided defined benefit pension accruals until October 1, 1996. As of October 1, 1996, Mr. Kelleher’s accrued defined benefit under the U.K. Pension Plan was converted to an account balance, the value of which is £82,831£107,048 ($132,851)169,672) as of December 31, 2011.2012. If the value of the account balance relating to the pre-October 1996 portion of Mr. Kelleher’s U.K. Pension Plan benefit, adjusted for investment experience until the payment date, is greater than the value of the guaranteed minimum pension under the U.K. Pension Plan, no defined benefit pension is payable. If the value of the guaranteed minimum pension, determined in accordance with U.K. laws, is greater than the value of the adjusted account balance, the guaranteed minimum pension is payable, in addition to any defined contribution amount payable for the period after September 30, 1996. Mr. Kelleher had seven years of credited service in the U.K Pension Plan at the time his accrued benefit was converted to an account balance. The amount shown in the table for Mr. Kelleher does not include defined contribution benefits that were accrued after September 30, 1996. The amount of British pounds sterling was converted to U.S. dollars using the 20112012 average of daily spot rates of £1 to $1.6039.$1.5850.
(5)In accordance with his Separation Agreement, Mr. Taubman will receive his accrued benefit through his termination date under the SEREP, in accordance with the terms of the SEREP, determined as if he were eligible for early retirement. The estimated present value of the incremental benefit provided under the SEREP based on service through his anticipated termination date is $1.7 million.
The following is a description of the material terms with respect to each of the plans referenced in the table above.
Employees Retirement Plan (ERP)
Substantially all of the U.S. employees of the Company and its U.S. affiliates hired before July 1, 2007, other than certain employees in the Company’s former mortgage business, were covered after one year of service by the ERP, a non-contributory, defined benefit pension plan that is qualified under Section 401(a) of the Internal Revenue Code. Effective after December 31, 2010, the ERP was frozen and no further benefit accruals will occur. Benefits are generally payable as an annuity at age 65 (or earlier, subject to certain reductions in the amounts payable). Under the pre-2004 provisions of the ERP, benefits are payable in full at age 60 and reduced 4% per year for retirement between ages 55 and 60 for employees who retire after age 55 with ten years of service. Before the ERP was frozen, annual benefits were equal to 1% of eligible earnings plus 0.5% of eligible earnings in excess of Social Security covered compensation for each year of service. Eligible earnings generally included all taxable compensation, other than certain equity-based and nonrecurringnon-recurring amounts, up to $170,000 per year. ERP participants who, as of January 1, 2004, had age plus service equal to at least 65 and who had been credited with five years of service, received benefits determined under the ERP’s pre-2004 benefit formula, if greater. Pre-2004 benefits equaled 1.15% of final average salary, plus 0.35% of final average salary in excess of Social Security covered compensation, in each case multiplied by Credited Servicecredited service up to 35 years, where final average salary was base salary, up to specified limits set forth in the ERP, for the highest paid 60 consecutive months of the last 120 months of service. Mr. Gorman, Ms. Porat and Mr. Taubman have accrued benefits in the ERP.
Supplemental Executive Retirement and Excess Plan (SEREP)
The SEREP is an unfunded, nonqualified plan. Credited Serviceservice is counted starting from the first day of the month after the hire date, except that for certain excess benefits Credited Servicecredited service begins after one year of service. The SEREP provides benefits not otherwise provided under the ERP formula because of limits in the ERP or
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Internal Revenue Code on eligible pay and benefits. The SEREP also provides certain grandfathered benefits and supplemental retirement income (unreduced at age 60) for eligible employees after offsetting other Company-provided pension benefits, pension benefits provided by former employers and, effective for calendar years after 2010, adjusted to take into account a portion of 401(k) contributions. The supplemental benefit, before offsets,
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equals 20% of final average salary plus 2% of final average salary per year after five years (up to 50% cumulatively) plus 1% of final average salary per year after 25 years (up to 60% cumulatively), where final average salary is base salary for the highest paid 60 consecutive months of the last 120 months of service, up to a maximum annual benefit payable of $140,000 at age 60, reduced by 4% per year for payments beginning before age 60. The SEREP was restricted effective January 1, 2004 to allow only “grandfathered” employees who as of that date met certain eligibility criteria to benefit from the plan. Grandfathering in this plan was provided to all similarly situated eligible employees and may be provided to other employees with the approval of the CMDS Committee. Benefits may be paid in various actuarially equivalent forms of annuity. Other than for small balances, no lump sums are available under this plan. Ms. Porat and Messrs. Kelleher and Taubman participate in the SEREP.
U.K. Group Pension Plan
Mr. Kelleher is a U.K.-benefits-eligible NEO who participates inUntil March 31, 2012, the Company contributed to the U.K. Pension Plan.Plan on behalf of Mr. Kelleher, and he remains a deferred vested participant in that plan. As described in note 4 to the “Pension Benefits Table,” the U.K. Pension Plan is a defined contribution plan that provided defined benefit accruals until 1996. The guaranteed minimum pension payable under the U.K. Pension Plan is determined in accordance with U.K. laws.
20112012 Nonqualified Deferred Compensation Table
The following table contains information with respect to the participation of the NEOs in the Company’s unfunded cash nonqualified deferred compensation plans that provide for the deferral of compensation on a basis that is not tax-qualified, as well as with respect to RSUs granted to the NEOs that are vested but have not yet converted to shares of Morgan Stanley common stock.
In addition to the Company equity plans, each NEO participated in one or more of seventhe following cash nonqualified deferred compensation plans as of December 31, 2011:2012: the Capital Accumulation Plan (CAP), the Key Employee Private Equity Recognition Plan (KEPER), the Notional Leveraged Co-Investment Plan (LCIP), MSCIP, the Pre-Tax Incentive Program (PTIP), the Select Employees’ Capital Accumulation Program (SECAP) and, the Strategic Equity Incentive Plan (SEIP) and the U.K. Alternative Retirement Plan (ARP). The NEOs participate in the plans on the same terms and conditions as other similarly situated employees. These terms and conditions are described below following the notes to the table. CAP, KEPER, LCIP, PTIP and SEIP are closed to new participants and contributions and SECAP washas not been offered to the NEOs for 2011.since 2010.
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Name | Executive Contributions in Last FY ($)(1) | Registrant Contributions in Last FY ($) | Aggregate Earnings in Last FY ($)(2) | Aggregate Withdrawals/ Distributions | Aggregate Balance at Last FYE ($)(4) | Executive Contributions in Last FY ($)(1) | Registrant Contributions in Last FY ($) | Aggregate Earnings in Last FY ($)(2) | Aggregate Withdrawals/ Distributions | Aggregate Balance at Last FYE ($)(4) | ||||||||||||||||||||||||||||||
James P. Gorman | ||||||||||||||||||||||||||||||||||||||||
LCIP | — | — | (32,088) | — | 1,171,476 | — | — | 348,549 | — | 1,520,025 | ||||||||||||||||||||||||||||||
MSCIP | 2,328,000 | — | 18,009 | 1,172,314 | 7,331,080 | 2,716,000 | — | 461,969 | 5,719,231 | 4,789,819 | ||||||||||||||||||||||||||||||
RSUs(5) | 3,879,978 | — | (8,473,617) | 72,143 | 10,440,962 | 5,043,989 | — | 2,876,117 | 1,874,047 | 16,509,391 | ||||||||||||||||||||||||||||||
Total
| 6,207,978 | — | (8,487,696) | 1,244,457 | 18,943,518 | 7,759,989 | — | 3,686,635 | 7,593,278 | 22,819,235 | ||||||||||||||||||||||||||||||
Ruth Porat | ||||||||||||||||||||||||||||||||||||||||
CAP | — | — | (15) | — | 7,082 | — | — | 2 | 7,083 | — | ||||||||||||||||||||||||||||||
KEPER | — | — | 1,214 | 2,486 | 10,049 | — | — | 957 | 1,774 | 9,232 | ||||||||||||||||||||||||||||||
LCIP | — | — | 20,208 | — | 20,208 | — | — | 8,450 | — | 28,657 | ||||||||||||||||||||||||||||||
MSCIP | 2,220,000 | — | (102,280) | 1,685,399 | 4,777,302 | 3,200,000 | — | 873,213 | 5,136,265 | 3,714,250 | ||||||||||||||||||||||||||||||
PTIP | — | — | (86,680) | — | 477,316 | — | — | 130,309 | — | 607,625 | ||||||||||||||||||||||||||||||
RSUs(5) | 3,699,981 | — | (3,445,078) | 3,332,006 | 4,332,927 | 3,199,997 | — | 1,125,777 | 1,884,986 | 6,793,245 | ||||||||||||||||||||||||||||||
SEIP | — | — | (1,828) | — | 72,952 | — | — | — | 72,952 | — | ||||||||||||||||||||||||||||||
Total
| 5,919,981 | — | (3,614,459) | 5,019,891 | 9,697,836 | 6,399,997 | — | 2,138,708 | 7,103,060 | 11,153,009 | ||||||||||||||||||||||||||||||
Gregory J. Fleming | ||||||||||||||||||||||||||||||||||||||||
MSCIP
| 2,100,000 | — | 1,803 | 1,050,743 | 1,051,060 | 3,400,000 | — | 102,643 | 2,801,556 | 1,752,146 | ||||||||||||||||||||||||||||||
RSUs(5) | 8,490,002 | (492,715 | ) | — | 8,037,736 | |||||||||||||||||||||||||||||||||||
Total
| 11,890,002 | (390,072 | ) | 2,801,556 | 9,789,882 | |||||||||||||||||||||||||||||||||||
Colm Kelleher | ||||||||||||||||||||||||||||||||||||||||
CAP | — | — | 27 | — | 11,024 | — | — | 2 | 11,026 | — | ||||||||||||||||||||||||||||||
LCIP | — | — | (6,948) | — | 1,792,127 | — | — | 538,159 | — | 2,330,286 | ||||||||||||||||||||||||||||||
MSCIP | 2,458,244 | — | 27,788 | 1,237,902 | 5,354,262 | 4,232,045 | — | 43,242 | 3,337,937 | 6,291,612 | ||||||||||||||||||||||||||||||
RSUs(5) | 4,097,068 | — | (4,648,781) | 1,322,926 | 5,668,201 | 2,539,209 | — | 1,532,859 | 1,367,949 | 8,385,796 | ||||||||||||||||||||||||||||||
ARP | — | 35,306 | (6)(7) | (249 | ) | �� | — | 35,057 | (7) | |||||||||||||||||||||||||||||||
Total
| 6,555,312 | — | (4,627,914) | 2,560,828 | 12,825,614 | 6,771,254 | 35,306 | 2,114,013 | 4,716,912 | 17,042,751 | ||||||||||||||||||||||||||||||
Paul J. Taubman | ||||||||||||||||||||||||||||||||||||||||
CAP | — | — | (659) | — | 29,005 | — | — | 7 | 29,012 | — | ||||||||||||||||||||||||||||||
KEPER | — | — | 38,838 | 79,561 | 321,564 | — | — | 30,611 | 56,763 | 295,411 | ||||||||||||||||||||||||||||||
LCIP | — | — | 149,063 | — | 3,544,994 | — | — | 824,179 | — | 4,369,173 | ||||||||||||||||||||||||||||||
MSCIP | 2,460,000 | — | 111,437 | 1,239,948 | 6,809,467 | 3,400,000 | — | 551,496 | 5,882,476 | 4,878,487 | ||||||||||||||||||||||||||||||
PTIP | — | — | 11,400 | — | 1,256,198 | — | — | 106,628 | — | 1,362,825 | ||||||||||||||||||||||||||||||
RSUs(5) | 4,099,998 | — | (8,345,655) | 80,932 | 10,242,723 | 3,399,982 | — | 2,598,649 | 2,352,864 | 13,914,240 | ||||||||||||||||||||||||||||||
SECAP | — | — | 45,736 | — | 5,039,626 | — | — | 86,187 | 300,322 | 4,825,491 | ||||||||||||||||||||||||||||||
SEIP | — | — | (564) | — | 24,702 | — | — | — | 24,702 | — | ||||||||||||||||||||||||||||||
Total | 6,559,998 | — | (7,990,404) | 1,400,441 | 27,268,279 | 6,799,982 | — | 4,197,757 | 8,646,139 | 29,645,627 |
(1)RSU contributions represent RSU awards granted in January 20112012 for 20102011 performance that are considered vested at grant (or with respect to Mr. Fleming, RSUs that became vested on February 8, 2012, when he became retirement-eligible) but are subject to cancellation until the scheduled conversion dates of such awards in 2014 and 2015, or with respect to Messrs. Fleming and Kelleher, in 2013, 2014 and 2014.2015. MSCIP contributions represent MSCIP awards granted in January 20112012 for 20102011 performance that are subject to vesting and cancellation until the scheduled payment dates of such awards in 20112012 and 2012. Other than2013 (or with respect to Mr. Taubman, theKelleher, in 2013, 2014 and 2015). The MSCIP awards reported in this table are also reported as part of the 20102011 bonus in the “2011“2012 Summary Compensation Table.” The value of the RSUs in this column (which are also included in the “Stock Awards” column of the “2011“2012 Summary Compensation Table” for 2011,2012, the “2011“2012 Grants of Plan-Based Awards Table”Table,” and the “2011“2012 Option Exercises and Stock Vested Table”) is (i) for the NEOs other than Mr. Fleming, the aggregate grant date fair value of the RSUs based on $29.8899,$18.159, the volume-weighted average price of the common stock on the grant date and (ii) for Mr. Fleming, the value of the RSUs on the vesting date based on $20.2682, the volume-weighted average price of the common stock on such date.
(2)With respect to our cash-based nonqualified deferred compensation plans, represents the change in (i) the balance of the NEO’s account reflected on the Company’s books and records at December 31, 2011,2012, without
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giving effect to any withdrawals or distributions, compared to (ii) the sum of the balance of the NEO’s account reflected on the Company’s books and records at December 31, 20102011 and the value of any contributions made during 2011.2012. Includes any nonqualified deferred compensation earnings that are disclosed in the “Change in Pension Value and Nonqualified Deferred Compensation Earnings” column of the “2011“2012 Summary Compensation Table” for 20112012 and described in note 6 thereto.
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With respect to the RSUs, represents (i) the change in the average of the high and low prices of the Company’s common stock on December 30, 201131, 2012 (or, if applicable, the earlier distribution date), compared to December 31, 201030, 2011 (or, if applicable, the later contribution date), as well as (ii) the amount of the vested cash dividend equivalent rights and dividend equivalents in the form of additional RSUs credited in 20112012 with respect to the award (which, for the RSUs granted prior to 2010, are paid to the RSU holder at the time dividends are paid to holders of the Company’s common stock and, for the RSUs granted in 2010 and 2011,following 2010, are paid to the award holder at the time that the underlying award converts to shares, subject to the same cancellation provisions as the underlying award).
(3)Represents distributions from our cash-based nonqualified deferred compensation plans and RSU conversions based on the average of the high and low prices of the Company’s common stock on the conversion date and, with respect to the RSUs, also represents amounts paid on RSUs during 20112012 pursuant to dividend equivalent rights.
(4) With respect to our cash-based nonqualified deferred compensation plans, represents the balance of the NEO’s account reflected on the Company’s books and records at December 31, 2011, and with2012. With respect to the RSUs, represents the number of vested units held by the NEO on December 31, 2011,2012 multiplied by the average of the high and low prices of the Company’s common stock on December 30, 2011,31, 2012, as well as the amount of the vested deferred cash dividend equivalent rights held with respect to the RSUs. All amounts deferred by a NEO in prior years have been reported in the Summary Compensation Tables in our previously filed proxy statements in the year earned (or with respect to equity awards, granted) to the extent he or she was a NEO for that year for purposes of the SEC’s executive compensation disclosure rules.
(5) The RSUs disclosed in this table include awards that as of December 31, 20112012 had vested, but had not reached their scheduled conversion date and remained subject to cancellation, as well as awards that had reached their scheduled conversion date, but were deferred to preserve the Company’s tax deductibility of the award, in accordance with the terms of the award.
(6) Represents monthly notional contributions made by the Company in 2012 to the ARP, a U.K. employer financed retirement benefits scheme, for Mr. Kelleher when he ceased participation in the U.K. Group Pension Plan. Amounts reported in this column are also reported in the All Other Compensation column of the “2012 Summary Compensation Table.”
(7) The Company’s aggregate notional monthly contributions to the ARP for Mr. Kelleher in 2012 of £22,275 ($35,306) and Mr. Kelleher’s aggregate balance at year-end of £22,118 ($35,057) were converted from British pounds sterling to U.S. dollars using the 2012 average of daily spot rates of £1 to $1.5850.
The following is a description of the material terms with respect to contributions, earnings and distributions applicable to each of the sevenfollowing cash nonqualified deferred compensation plans and the RSUs referenced in the table above.
Capital Accumulation Plan
Under CAP, participants were granted a number of units based on their level of compensation in excess of base salary. The plan has been closed to new contributions since 1998. Earnings on units arewere based on notional interests in investment earnings and interest on risk capital investments selected by the Company. Participants generally receivereceived plan distributions after dividends, distributions of capital, liquidation proceeds or other distributions arewere paid from the underlying investments. The plan has been closed to new contributions since 1998 and was terminated effective December 31, 2011. Final distributions under CAP were made in 2012.
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Key Employee Private Equity Recognition Plan
Under KEPER, participants were permitted to defer a portion of their cash bonus. The plan has been closed to new contributions since 2001. Contributions to KEPER are notionally invested by the Company in reference investments. Such reference investments may include investments made by Company-sponsored private equity funds, investments made by private equity funds sponsored by third parties in which the Company has acquired or will acquire a limited partner or similar interest, and investments in private equity securities that the Company makes for its own account. Distributions are made to participants following the realization of any proceeds in respect of any investment. The amounts contributed by a participant plus any earnings on participant contributions under the program remain subject to cancellation under specified circumstances.
Notional Leveraged Co-Investment Plan
Under LCIP, participants maywere permitted to allocate a portion of their long-term incentive compensation to the plan. LCIP is closed to new participants and has not been offered since 2008. For each of fiscal 2006, fiscal 2007 and fiscal 2008, participants were permitted to allocate up to 40% of their long-term incentive compensation to LCIP.
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The Company may makecontributed a notional investment in an amount equal to a multiple of each participant’s contribution (for each of fiscal 2006, fiscal 2007 and fiscal 2008, this multiple was two; however, for fiscal 2008, participants could elect to forgo the notional investment). Contributions are notionally invested by the Company in reference investments, which may include the Company’s proprietary investment funds, “funds of funds” that include Company proprietary investment funds and third-party investment funds, and other third-party investment funds. All amounts contributed by a participant plus any earnings on participant contributions and the Company notional investment arewere subject to cancellation under specified circumstances until three years after deferral. Participants generally are entitled to receive distributions in respect of their contributions plus any earnings on their contributions and on the Company notional investment on the third anniversary of grant and the tenth anniversary of grant, based on the valuation of the notional investments and any realizations of those investments prior to the scheduled distribution date. Participant distributions under LCIP are offset by the Company notional investment, excluding any earnings thereon.
Morgan Stanley Compensation Incentive Plan
Beginning with fiscal 2008 year-end compensation, a portion of the NEOs’ year-end long-term incentive compensation was mandatorily deferred into MSCIP. Earnings on MSCIP awards are based on the performance of notional investments available under the plan and selected by the participants. Participants may reallocate such balances periodically, as determined by the plan administrator. Until MSCIP awards reach their scheduled distribution date, they are subject to cancellation and clawback by the Company. The cancellation and clawback events applicable to MSCIP awards held by our NEOs are described below in “Potential Payments Uponupon Termination or Change-in-Control.”
Pre-Tax Incentive Program
Under PTIP, participants were permitted to defer a portion of their cash bonus or commissions for one or more fiscal years. The plan has been closed to new contributions since 2003. Earnings on PTIP contributions are based on the performance of notional investments available under the plan and selected by the participants. Participants could generally elect the commencement date for distributions of their contributions and earnings and the number of annual installments over which to receive distributions (generally, 5, 10, 15 or 20 years). Subject to earlier distribution on death or termination of employment due to disability, no distributions may begin prior to the attainment of age 55, and no distribution may begin prior to termination of employment.
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Select Employees’ Capital Accumulation Program
Under SECAP, participants are permitted to defer a portion of their commissions for one or more fiscal years and in prior years, participants were permitted to defer a portion of their cash bonus or commissionsbonuses for one or more fiscal years. Earnings on SECAP contributions are based on the performance of notional investments available under the plan and selected by the participants. Participants can generally elect the commencement date for distributions of their contributions and earnings and the number of annual installments over which to receive distributions (generally, one to ten years), subject to earlier distribution on death or termination of employment. No distributions may begin later than January 2 following the year in which the participant attains age 65.
Strategic Equity Incentive Plan
Under SEIP, participants were granted notional points to compensate them for their contributions to the growth and profits of the Company. SEIP points entitleentitled a participant to a pro-rata share of earnings based on the performance of notional risk capital investments selected by the Company. SEIP points were awarded for performance years 1999, 2000 and 2001. The plan has been closed to new participants since 2001. The final distribution in respect of SEIP points awarded for 1999 was made in 2010 and the last remaining distribution in respect of SEIP points awarded for 2000 and 2001 will bewas made in 2012.
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RSUsRestricted Stock Units
RSUs may be granted under the Morgan Stanley 2007 Equity Incentive Compensation Plan or any other Company equity plan as determined by the CMDS Committee. Each RSU constitutes a contingent and unsecured promise of the Company to pay the holder one share of Company common stock on the conversion date of the RSU. The RSUs included in this table are considered vested; however, the RSUs are subject to cancellation if a cancellation event occurs at any time prior to the scheduled conversion date. RSUs granted in 2012 and later are subject to clawback, as well as cancellation, prior to the scheduled conversion date. The cancellation and clawback events applicable to RSUs held by our NEOs are described in the CD&A and in “Potential Payments Uponupon Termination or Change-in-Control,” as applicable.
U.K. Alternative Retirement Plan
The ARP is a U.K. employer financed retirement benefits scheme as defined by HMRC. Under the ARP, participants receive monthly notional contributions from the Company based on a percentage of base salary, subject to specified limits. Participants may also elect to contribute a portion of their cash bonus and distributions from certain cash-based nonqualified deferred compensation plans to the ARP. Participants include those employees who either have an accumulated pension value in the U.K. Group Pension Plan that exceeds a limit set by the U.K. government or have elected pension taxation protection available from the HMRC. Earnings on ARP contributions are based on the performance of notional investments available under the ARP and selected by the participants. Participants can generally elect the commencement date for distributions at any time after age 55, so long as no distributions begin later than age 75. Distributions are currently paid in the form of a lump sum.
Potential Payments Uponupon Termination or Change-in-Control
This section describes and quantifies the benefits and compensation to which each NEO would have been entitled under our existing plans and arrangements if his or her employment had terminated or if the Company had undergone a change-in-control, in each case on December 31, 2011.2012. The section does not include any awards granted to our NEOs in January 20122013 for performance in 2011,2012 or for future performance beginning in 2013, as such awards were not outstanding, and the NEOs were not entitled to such awards, as of December 31, 2011.2012. For purposes of valuing any equity awards, we have assumed a per share value of $15.13,$19.12, the closing price of the Company’s common stock on December 30, 2011.31, 2012.
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Although Mr. Taubman resigned from his position as Co-President of Institutional Securities as of December 31, 2012, he is expected to remain an employee of the Company through his anticipated employment end date of May 5, 2013. The amounts and benefits described herein with respect to Mr. Taubman that assume an employment end date of December 31, 2012 do not take into account those that he is currently entitled to under his Separation Agreement because such agreement was not entered into until January 3, 2013. The CD&A describes the material benefits to which Mr. Taubman is entitled pursuant to the Separation Agreement.
I. | General Policies |
Our NEOs are not entitled to cash severance payments upon any termination of employment, but they are entitled to receive health and welfare benefits that are generally available to all salaried employees, such as accrued vacation pay and death, disability and post-retirement welfare benefits. Our NEOs are not entitled to special or enhanced termination benefits under our pension and nonqualified deferred compensation plans as compared to other employees.employees, except as described in the CD&A and notes to the “2012 Pension Benefits Table” with respect to the SEREP benefits provided to Mr. Taubman pursuant to his Separation Agreement.
Following termination of employment, the NEOs are entitled to amounts, to the extent vested, due under the terms of our pension arrangements, as described in the “2011“2012 Pension Benefits Table” and accompanying narrative. Further, upon a termination of employment, NEOs are entitled to the nonqualified deferred compensation amounts, to the extent vested, reported in the “2011“2012 Nonqualified Deferred Compensation Table” pursuantsubject to the terms of the arrangements, as described in the accompanying narrative.
Even if a NEO is considered vested in a long-term incentivedeferred award reported in the “2011“2012 Nonqualified Deferred Compensation Table,” the award may be subject to cancellation through the distribution date of such award in the event the NEO engages in a cancellation event or, if applicable, a clawback event occurs.
In general, a cancellation event with respect to such vested long-termdeferred incentive awards and the awards described in the table below includes: engaging in competitive activity during a specified period following a voluntary termination of employment (other than following a Good Reason termination for Mr. Gorman’s 2009 and 2010 year-end awards); a termination for cause, a later determination that the NEO’s employment could have been terminated for cause or engaging in cause whether or not employment has been terminated; improper disclosure of the Company’s proprietary information; solicitation of Company employees, clients or customers during employment or within a specified period following termination of employment; the making of unauthorized comments regarding the Company; resignation of employment without providing the Company advance notice within a specified period; or for 2009 and 2010 year-end awards, the failure or refusal following termination of employment to cooperate with or assist the Company in connection with investigations, regulatory matters, lawsuits or arbitrations in which the NEO may have pertinent information. “Good Reason,” with respect to Mr. Gorman, generally means a material change or reduction in his duties or responsibilities, including a failure to re-elect him to the Board, any diminution in his title or reporting relationship, the Company’s breach of its obligations to provide payments or benefits under his employment arrangement or requiring Mr. Gorman to be based at a location other than the Company’s headquarters.
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MSCIP awards and 2011 year-end equity-based awards also include a provision for clawback by the Company through the applicable scheduled paymentdistributed date of such awards, which can be triggered if an individual takes, or omits to take, any actionengages in conduct (including with respect to supervisory responsibilities) that causesdetrimental to the need forCompany, including causing a restatement of financial results a significant financial loss or other reputational harmviolating the Company’s risk policies and standards. MSCIP awards are also subject to the Company or one of its businesses, orclawback if the Company determines that there has beenindividual causes or is reasonably expected to cause, a substantial financial loss on a trading position,strategy, investment, commitment or other holding or a loss on a trading position, investment, commitment or other holding where the NEO operated outside the applicable risk parameters or profile, and in either case, such position,strategy, investment, commitment or other holding was a factor in the award determination.
Further, shares resulting from the conversion of the PSUs are subject to clawback by the Company in the event the Company’s achievement of the specified goals was based on materially inaccurate financial statements or other performance metric criteria.
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In addition to the cancellation and clawback events described above, each NEO is party to a Notice and Non-Solicitation Agreement that provides for injunctive relief and cancellation of any equity or other incentive awards granted with respect to fiscal 2005 and thereafter, whether or not vested, in the event that the NEO does not provide 180 days’ advance notice prior to a resignation from employment or in the event that the NEO improperly solicits our employees, clients or customers during employment and for 180 days following termination of employment.
II. | Amounts Vesting upon a Termination of |
With respect to the unvested outstanding long-term incentive awards held by the NEOs, each NEO would behave been entitled to the following amounts in the event of a termination of employment, or change-in-control of the Company, on December 31, 2011,2012, subject to no cancellation event or clawback event occurring through the distribution date of such award, as applicable.
Termination Reason/ Change-in-Control | Name | Value of Unvested RSUs and related dividend equivalents(1) | Value of Unvested PSUs and related dividend equivalents(2) | Value of Unvested Stock Options(3) | Value of Unvested MSCIP Awards(4) | |||||||||||
Involuntary Termination (other than for cause or a cancellation event)/Termination Due to Disability/ Qualifying Termination(5) | James P. Gorman | — | $230,257 | $0 | $1,181,584 | |||||||||||
Ruth Porat | — | $199,540 | $0 | $1,142,416 | ||||||||||||
Gregory J. Fleming | $5,254,769 | $37,329 | $0 | $1,051,060 | ||||||||||||
Colm Kelleher | — | $200,009 | $0 | $1,247,690 | ||||||||||||
Paul J. Taubman | — | $235,252 | $0 | $1,177,672 | ||||||||||||
Retirement/Voluntary Termination(6) | James P. Gorman | — | $230,257 | forfeit | forfeit | |||||||||||
Ruth Porat | — | $199,540 | forfeit | forfeit | ||||||||||||
Gregory J. Fleming | forfeit | forfeit | forfeit | forfeit | ||||||||||||
Colm Kelleher | — | $200,009 | forfeit | forfeit | ||||||||||||
Paul J. Taubman | — | $235,252 | forfeit | forfeit | ||||||||||||
Good Reason Termination(7) | James P. Gorman | — | $230,257 | forfeit | $1,181,584 | |||||||||||
Gregory J. Fleming | $3,459,687 | forfeit | forfeit | forfeit | ||||||||||||
Termination Due to Death/ Governmental Service Termination(8) | James P. Gorman | — | $188,875 | $0 | $1,181,584 | |||||||||||
Ruth Porat | — | $160,077 | $0 | $1,142,416 | ||||||||||||
Gregory J. Fleming | $5,254,769 | $0 | $0 | $1,051,060 | ||||||||||||
Colm Kelleher | — | $156,311 | $0 | $1,247,690 | ||||||||||||
Paul J. Taubman | — | $191,523 | $0 | $1,177,672 | ||||||||||||
Change-in-Control (for PSUs, with a termination of employment)(9) | James P. Gorman | — | $230,257 | — | — | |||||||||||
Ruth Porat | — | $199,540 | — | — | ||||||||||||
Gregory J. Fleming | $3,459,687 | $37,329 | — | — | ||||||||||||
Colm Kelleher | — | $200,009 | — | — | ||||||||||||
Paul J. Taubman | — | $235,252 | — | — |
Termination Reason or Change In Control | Name | Value of ($)(1) | Value of Unvested ($)(2) | Value of ($)(3) | Value of ($)(4) | |||||||||||
Involuntary Termination (other than due to cause or other cancellation event) / Termination Due to Disability / Qualifying Termination(5) | James P. Gorman | — | 318,705 | — | 1,401,006 | |||||||||||
Ruth Porat | — | 262,850 | — | 1,726,803 | ||||||||||||
Gregory J. Fleming | — | 279,278 | — | 1,752,146 | ||||||||||||
Colm Kelleher | — | 278,098 | — | — | ||||||||||||
Paul J. Taubman | — | 279,278 | — | 1,797,666(9) | ||||||||||||
Retirement / Voluntary Termination(6) | James P. Gorman | — | 318,705 | — | forfeit | |||||||||||
Ruth Porat | — | 262,850 | — | forfeit | ||||||||||||
Gregory J. Fleming | — | 279,278 | — | forfeit | ||||||||||||
Colm Kelleher | — | 278,098 | — | — | ||||||||||||
Paul J. Taubman | — | 279,278 | — | forfeit | ||||||||||||
Termination Due to Death / Governmental Service Termination(7) | James P. Gorman | — | 298,118 | — | 1,401,006 | |||||||||||
Ruth Porat | — | 245,871 | — | 1,726,803 | ||||||||||||
Gregory J. Fleming | — | 261,238 | — | 1,752,146 | ||||||||||||
Colm Kelleher | — | 260,134 | — | — | ||||||||||||
Paul J. Taubman | — | 261,238 | — | 1,797,666 | ||||||||||||
Change in Control (for PSUs, assuming a termination of employment on December 31, 2012)(8) | James P. Gorman | — | 318,705 | — | — | |||||||||||
Ruth Porat | — | 262,850 | — | — | ||||||||||||
Gregory J. Fleming | — | 279,278 | — | — | ||||||||||||
Colm Kelleher | — | 278,098 | — | — | ||||||||||||
Paul J. Taubman | — | 279,278 | — | — |
(1) As of December 31, 2011,2012, our NEOs other than Mr. Fleming, were considered retirement-eligible for purposes of their outstanding RSU awards and related dividend equivalents (which are set forth in the “2011“2012 Nonqualified Deferred Compensation Table”) and, therefore, the NEOs are considered vested in such awards.
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(2) The amounts set forth in this column reflect amounts payable with respect to PSUs granted for 2011 performance. As described in the “2012 Outstanding Equity Awards at Fiscal Year-End Table,” based on Company performance through December 31, 2012, the NEOs would not have earned any portion of the PSUs granted with respect to 2009 or 2010 performance. Pursuant to the terms of the PSU awards, amounts set forth in this column with respect to (a) the NEO’s death or governmental service termination reflect Company performance through September 30, 20112012 (the quarter ending simultaneously with or before the date of such termination for which the Company’s earnings information had been released as of the date of termination) and (b) a change-in-control of the Company reflect Company performance through December 31, 20112012 (the quarter ending simultaneously with the effective date of the change-in-control). Amounts set forth in this column for all other terminations of employment as of December 31, 20112012 assume the Company’s performance through the applicable three-year performance period mirrormirrors its performance through December 31, 2011. Where applicable,2012. The amounts reflect a pro-rata reduction in the number of PSUs otherwise payable given Company performance due to the NEO’s termination of employment prior to the applicable scheduled vesting date.
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(3) As of December 31, 2012, our NEOs were considered retirement-eligible for purposes of their outstanding stock options and, therefore, the NEOs are considered vested in such awards. No outstanding stock options held by the NEOs had intrinsic value as of December 31, 2011,2012, as the exercise price of the stock options was in all cases greater than $15.13,$19.12, the closing price of the Company’s common stock on December 30, 2011.31, 2012.
(4) As of December 31, 2011,2012, our NEOs other than Mr. Fleming, were considered retirement-eligible for purposes of, and therefore are considered vested in, all of the outstanding MSCIP awards set forth in the “2011“2012 Nonqualified Deferred Compensation Table,” except that the NEOs, other than Mr. Kelleher, are not retirement-eligible for purposes of, and are not considered vested in, the 2011 year-end MSCIP awards. Other than with respect to the 2010 year-end MSCIP awards, and therefore the NEOs are considered vested in such awards. AmountsMr. Kelleher, amounts set forth in this column reflect the value of the NEOs’ 20102011 year-end MSCIP awards.
(5) Amounts set forth in this row will generally be paid on the scheduled distribution dates, subject to cancellation and clawback provisions, as applicable; providedapplicable, except that amounts set forth in this row with respect to RSURSUs and MSCIP awards that are payable in connection with a qualifying termination will be paid upon such termination. UnvestedOutstanding options that are not then exercisable will become exercisable and all options will vest upon such termination and will generally expire on (a) February 2, 2016 upon an involuntary termination of employment or qualifying termination or (b) onremain exercisable through the expiration date in connection with a termination due to disability. For purposes of the RSUs, stock options and MSCIP awards set forth in this row, adate. A “qualifying termination” is a termination within 18 months of a change-in-control as a result of (i) the Company terminating the NEO’s employment under circumstances not involving any cancellation event, (ii) the NEO resigning from employment due to a materially adverse alteration in his or her position or in the nature or status of his or her responsibilities from those in effect immediately prior to the change-in-control or (iii) the Company requiring the NEO’s principal place of employment to be located more than 75 miles from his or her current principal location. For this purpose, the definition of “change-in-control” generally means a significant change in the share ownership or composition of the Board. The PSUs set forth in this row do not include an accelerated vesting and/or payment provision in connection with a qualifying termination.
(6) Amounts set forth in this row will be paid on schedule, subject to cancellation, and outstanding options that are not then exercisable will become exercisable and all options will generally remain exercisable through the expiration date, subject to cancellation.
(7) Other than with respect to Messrs. Gorman and Fleming, no NEO is a party to an arrangement with the Company providing for accelerated vesting or other benefits upon a termination of employment for Good Reason. Amounts set forth in this row will be paid on schedule, subject to cancellation and clawback provisions, as applicable (provided that, following a Good Reason termination, the competitive activity cancellation event does not apply to Mr. Gorman’s awards set forth in this row). “Good Reason,” with respect to Mr. Gorman, generally means a material change or reduction in his duties or responsibilities, including a failure to reelect him to the Board, any diminution in his title or reporting relationship, the Company’s breach of its obligations to provide payments or benefits under the applicable compensation arrangement or requiring Mr. Gorman to be based at a location other than the Company’s headquarters. “Good Reason,” with respect to Mr. Fleming, generally means a reduction in base salary, a failure to honor the terms of his award, a material diminution in his duties, titles, responsibilities or reporting relationship or interference with his carrying out of his duties or material failure to make available resources required for him to effectively carry out his duties, the assignment of materially inconsistent duties or those which materially impair his ability to function in his current role, a relocation of the Company’s headquarters or his principal office greater than 25 miles or a material breach by the Company of any material agreement between him and the Company.
(8) Amounts set forth in this row with respect to RSUs and PSUs will be paid upon such termination and, pursuant to the terms of the awards, amounts set forth with respect to PSUs reflect Company performance through September 30, 2011. Unvested
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2012. Outstanding options that are not then exercisable will become exercisable and all options will vest andgenerally remain exercisable through the expiration date (in connection with the NEO’s death) or the 90-day period following termination (in connection with a governmental service termination).date. In exchange for the accelerated vesting, exercisability and payment of the amounts set forth in this row with respect toawards upon a governmental service termination, the NEO must sign an agreement requiring the NEO to repay the Company the value of the awards that are distributed or exercised in connection with such termination if the NEO engages in any activity that would have resulted in the cancellation of such awards had the distribution, vesting or vestingexercisability of the awards not been accelerated.
(9)(8) Pursuant to the terms of the PSUs, in the event of a change-in-control of the Company on December 31, 2011,2012, the performance period would have ended on December 31, 2011;2012; however, in general, the NEO must remain employed by the Company through the applicable scheduled vesting date to not be subject to a pro-rata reduction in the number of shares payable with respect to the PSUs. For purposes of quantifying the value of PSUs to which the NEO would have been entitled upon a change-in-control on December 31, 2011,2012, amounts set forth in this row with respect to the PSUs assume that each NEO terminated employment on December 31, 2011 (due to either a disability or an involuntary termination of employment other than in connection with a cancellation event),2012, and therefore, the value reflects a pro-rata reduction in the number of PSUs otherwise payable where applicable.payable. Amounts set forth in this row will be paid on schedule, subject to cancellation.
(9)Mr. Taubman will vest in his 2011 year-end MSCIP award on his employment end date in 2013, as set forth in his Separation Agreement, and such award will be paid on schedule, subject to cancellation.
III. | Change-in-Control |
Mr. Gorman’s employment arrangement with the Company, dated August 16, 2005, provides that if it is determined that any payments made to him in connection with a change-in-control of the Company would be subject to an excise tax under Section 4999 of the Internal Revenue Code, he would be entitled to receive an additional payment to restore him to the after-tax position that he would have been in if the tax had not been
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imposed. Calculations to estimate the excise tax due under the Internal Revenue Code are complex and reflect a number of assumptions. For purposes of determining whether Mr. Gorman would have been entitled to an additional payment due to a change-in-control as of December 31, 2011,2012, the following assumptions were made: (i) all RSUs, MSCIP and LCIP awards and the applicable pro-rata portion of PSUs became payable, (ii) all stock options became immediately exercisable, (iii) all cancellation provisions and transfer restrictions lift, (iii)(iv) an excise tax rate of 20% and (iv)(v) an individual tax rate of 45%. Based on these assumptions, Mr. Gorman would not have been entitled to an additional payment.
Item 2—Ratification of Appointment of Morgan Stanley’s Independent Auditor
OUR BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE RATIFICATION OF DELOITTE & TOUCHE’S APPOINTMENT AS OUR INDEPENDENT AUDITOR.
The Audit Committee appointed Deloitte & Touche LLP (Deloitte & Touche) as independent auditor for the year ending December 31, 20122013 and presents this selection to the shareholders for ratification. Deloitte & Touche will audit our consolidated financial statements that will be included in the Annual Report on Form 10-K for the year ending December 31, 20122013 and will perform other permissible, pre-approved services. The Audit Committee preapprovespre-approves all audit and permitted non-audit services that Deloitte & Touche performs for the Company.
Independent Auditor’s Fees. The following table summarizes the aggregate fees (including related expenses; $ in millions) for professional services provided by Deloitte & Touche related to 20112012 and 2010.2011.
2011 | 2010 | |||||||||
Audit Fees(1) | $ | 43.4 | $ | 43.4 | ||||||
Audit-Related Fees(2) | 8.5 | 6.5 | ||||||||
Tax Fees(3) | 1.3 | 1.3 | ||||||||
All Other Fees | — | — | ||||||||
Total | $ | 53.2 | $ | 51.2 |
2012 ($) | 2011 ($) | |||||||
Audit Fees(1) | 45.7 | 43.4 | ||||||
Audit-Related Fees(2) | 8.0 | 8.5 | ||||||
Tax Fees(3) | 2.0 | 1.3 | ||||||
All Other Fees | — | — | ||||||
|
|
|
| |||||
Total | 55.7 | 53.2 |
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(1) Audit Fees services include: the audit of our consolidated financial statements included in the Company’s Annual Report on Form 10-K and reviews of the interim condensed consolidated financial statements included in our quarterly reports on Form 10-Q; services attendant to, or required by, statute or regulation; comfort letters, consents and other services related to SEC and other regulatory filings; and audits of subsidiary financial statements.
(2) Audit-Related Fees services include: due diligence associated with mergers and acquisitions or dispositions of operating businesses or entities; data verification and agreed-upon procedures related to asset securitizations; assessment and testing of internal controls and risk management processes beyond the level required as part of the consolidated audit; statutory audits and financial audit services provided relating to investment products offered by Morgan Stanley, where Morgan Stanley incurs the audit fee in conjunction with the investment management services it provides; audits of employee benefit plans; agreed upon procedures engagements; regulatory matters; and attest services in connection with debt covenants.
(3) Tax Fees services include: U.S. federal, state and local income and non-income tax planning and advice; U.S. federal, state and local income and non-income tax compliance; non-U.S. income and non-income tax planning and advice; non-U.S. income and non-income tax compliance; and transfer pricing documentation.
Fund-Related Fees.Morgan Stanley offers registered money market, equity, fixed income and alternative funds, and other funds (collectively, Funds). Deloitte & Touche provides audit, audit-related and tax services to certain of these Funds. The aggregate fees for such services are summarized in the following table ($ in millions).
2011 | 2010 | 2012 ($) | 2011 ($) | |||||||||||||||
Audit Fees | $ | 3.8 | $5.8 | 4.4 | 3.8 | |||||||||||||
Audit-Related Fees | 0 | 2.2 | 0.2 | — | ||||||||||||||
Tax Fees | 3.3 | 2.3 | 3.5 | 3.3 |
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A Deloitte & Touche representative will attend the annual meeting to respond to your questions and will have the opportunity to make a statement. If shareholders do not ratify the appointment, the Audit Committee will reconsider it.
Our Board unanimously recommends athat you vote “FOR” the ratification of Deloitte & Touche’s appointment as our independent auditor. Proxies solicited by the Board will be voted “FOR” this ratification unless otherwise instructed.
The Audit Committee’s charter provides that the Audit Committee is responsible for the oversight of the integrity of the Company’s consolidated financial statements, the Company’s system of internal control over financial reporting, certain aspects of the Company’s risk management as described in the charter, the qualifications and independence of the Company’s independent registered public accounting firm (independent auditor), the performance of the Company’s internal auditor and independent auditor, and the Company’s compliance with legal and regulatory requirements. We have the sole authority and responsibility to appoint, compensate, evaluate and, when appropriate, replace the Company’s independent auditor. The Board has determined that each Audit Committee member is independent under applicable independence standards of the NYSE and the Securities Exchange Act of 1934, as amended, and is an audit committee financial expert within the meaning of current SEC rules.
The Audit Committee serves in an oversight capacity and is not part of the Company’s managerial or operational decision-making process. Management is responsible for the financial reporting process, including the system of internal controls, for the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the U.S. (GAAP) and for the report on the Company’s internal control over
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financial reporting. The Company’s independent auditor, Deloitte & Touche, is responsible for auditing those financial statements and expressing an opinion as to their conformity with GAAP and expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Our responsibility is to oversee the financial reporting process and to review and discuss management’s report on the Company’s internal control over financial reporting. We rely, without independent verification, on the information provided to us and on the representations made by management, the internal auditor and the independent auditor.
The Audit Committee, among other things:
Reviewed and discussed the Company’s quarterly earnings releases, Quarterly Reports on Form 10-Q and Annual Report on Form 10-K, including the consolidated financial statements;
Reviewed the major franchise, reputational, legal and compliance risk exposures and the guidelines and policies that govern the process for risk assessment and risk management, including coordinating with the Risk Committee and the Operations and Technology Committee;
Reviewed and discussed the plan and the scope of the work of the internal auditor for 20112012 and summaries of the significant reports to management by the internal auditor;
Reviewed and discussed the plan and scope of work of the independent auditor for 2011;2012;
Reviewed and discussed reports from management on the Company’s policies regarding applicable legal and regulatory requirements; and
Met with Deloitte & Touche, the internal auditor and Company management in executive sessions.
We reviewed and discussed with management, the internal auditor and Deloitte & Touche: the audited consolidated financial statements for 2011,2012, the critical accounting policies that are set forth in the Company’s Annual Report on Form 10-K, management’s annual report on the Company’s internal control over financial reporting and Deloitte & Touche’s opinion on the effectiveness of the Company’s internal control over financial reporting.
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We discussed with Deloitte & Touche matters that independent registered public accounting firms must discuss with audit committees under standards of the Public Company Accounting Oversight Board (PCAOB), including, among other things, matters related to the conduct of the audit of the Company’s consolidated financial statements and the matters required to be discussed by Auditing Standards AU Section 380 (Communication with Audit Committees) as adopted by the PCAOB in Rule 3200T. This review included a discussion with management and the independent auditor of the quality (not merely the acceptability) of the Company’s accounting principles, the reasonableness of significant estimates and judgments, and the disclosures in the Company’s consolidated financial statements, including the disclosures relating to critical accounting policies.
Deloitte & Touche also provided to the Audit Committee the written disclosures and the letter required by applicable requirements of the PCAOB regarding the independent auditor’s communications with the Audit Committee concerning independence and represented that it is independent from the Company. We discussed with Deloitte & Touche their independence from the Company, and considered if services they provided to the Company beyond those rendered in connection with their audit of the Company’s consolidated financial statements, reviews of the Company’s interim condensed consolidated financial statements included in its Quarterly Reports on Form 10-Q, and their opinion on the effectiveness of the Company’s internal control over financial reporting were compatible with maintaining their independence. We also reviewed and pre-approved, among other things, the audit, audit-related and tax services performed by Deloitte & Touche. We received regular updates on the amount of fees and scope of audit, audit-related and tax services provided.
Based on our review and the meetings, discussions and reports discussed above, and subject to the limitations on our role and responsibilities referred to above and in the Audit Committee charter, we recommended to the Board
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that the Company’s audited consolidated financial statements for 20112012 be included in the Company’s Annual Report on Form 10-K. We also selected Deloitte & Touche as the Company’s independent auditor for the year ending December 31, 20122013 and are presenting the selection to the shareholders for ratification.
Respectfully submitted,
Donald T. Nicolaisen, Chair
Howard J. Davies
JamesRobert H. Hance, Jr.Herz
O. Griffith Sexton
Item 3—Company Proposal to Approve the Compensation of Executives as Disclosed in the Proxy Statement (Non-Binding Advisory Resolution)
OUR BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THIS PROPOSAL.
As required by Section 14A of the Securities Exchange Act, this proposal seeks a shareholder advisory vote to approve the compensation of our NEOs as disclosed pursuant to Item 402 of Regulation S-K through the following resolution:
“RESOLVED, that the Company’s shareholders approve, on an advisory basis, the compensation of the Company’s named executive officers, as disclosed in the Company’s proxy statement for the 2013 Annual Meeting of Shareholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission (which disclosure includes the Compensation Discussion and Analysis and the accompanying compensation tables and related narrative).”
Morgan Stanley’s shareholders are urged to read the CD&A, which discusses our compensation policies and procedures in detail and explains how the compensation program implements our compensation philosophy.
Morgan Stanley ties executive compensation to Company and individual performance. The CMDS Committee places performance at the forefront of the structure and administration of executive compensation. This
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performance orientation is demonstrated in the structure of executive compensation, the performance results that drive compensation decisions and the resulting executive compensation decisions for the CEO, James Gorman, and the other NEOs.
Overall, the CMDS Committee evaluated a number of performance elements for 2012 as described in the CD&A, including: the Company’s financial performance, the Company’s balance sheet strength, successful execution of major business strategies, absolute and relative shareholder returns, headcount and expense management, and broad-based compensation discipline and reductions. Based on this evaluation, the Committee:
• | Reduced CEO Annual Performance Compensation. For 2012, the CEO was granted $6,000,000 in compensation ($800,000 base salary, $2,575,000 in deferred cash-based awards and $2,625,000 in stock option awards). On a comparable basis, this amount represented a 30% decline from 2011 annual performance compensation of $8,560,000 (excluding performance stock units granted as part of 2011 annual compensation). |
• | Increased Proportion of CEO Comprehensive Pay Opportunity Subject to Future Long-Term Performance. The CEO was also granted a future-oriented, long-term incentive program (LTIP) award with a grant date target value of $3,750,000, the ultimate realizable value of which will be directly determined by 2013-2015 return on equity and relative total shareholder return performance. The CEO’s comprehensive pay opportunity (2012 annual performance compensation when combined with 2013-2015 LTIP award) is $9,750,000. His LTIP award represents 38% of his comprehensive pay opportunity, a substantial increase from 2011, when 18% of the CEO’s comprehensive pay opportunity ($1,940,000) was awarded in performance stock units. |
• | Reduced CEO Comprehensive Pay Opportunity. The comprehensive pay opportunity for the CEO of $9,750,000 was reduced 7% from $10,500,000 for 2011. When viewed from the perspective of the 2012 Summary Compensation Table in this proxy statement, the CEO’s reported compensation was reduced 18% to approximately $10.7 million for 2012, down from approximately $13 million for 2011. |
• | Delivered Significant Equity-Based Compensation. 71% of the CEO’s comprehensive pay opportunity, excluding base salary, is equity-based to further drive shareholder alignment. His equity-based compensation consists of the $3,750,000 target value LTIP award, which is payable in shares only if certain performance conditions are met over the three-year performance period, and $2,625,000 in stock options (stock options, rather than stock units, were utilized in 2012 to preserve tax-deductibility to the Company, see “Tax Deductibility” under Section III.A in the CD&A). |
• | Awarded No Current Bonus. 100% of the CEO’s year-end bonus is deferred. The CEO’s vesting period continues to be three years for deferred equity-based compensation. The Company has additionally increased the vesting period for deferred cash-based compensation to three years – an increase of one year from the prior year’s deferral period – with payments scheduled over the period May 2013 to November 2015. |
• | Subjected All Deferred Compensation to Clawback. All deferred compensation for the CEO is subject to clawback as described in the CD&A, including if his acts or omissions (including with respect to direct supervisory responsibilities) cause a restatement of the Company’s consolidated financial results or constitutes a violation of the Company’s global risk management principles, policies and standards. |
2012 compensation for the other NEOs was generally reduced in line with the reduction in the CEO’s compensation, and the structure of their compensation is generally consistent with the CEO’s. In addition, no hedging of Morgan Stanley equity is permitted for the CEO or other NEOs, and they are subject to an Equity Ownership Commitment that requires them to retain at least 75% of common stock and equity awards (less allowances for the payment of any option exercise price and taxes) made to them for service on the Company’s Operating Committee.
Overall, while the CMDS Committee believes that the strategic and financial foundations for the Company’s future success have been put in place, compensation for the CEO and other NEOs has been reduced to reflect the Company’s 2012 performance. The structure of compensation has also been refined to increase shareholder alignment by substantially increasing the proportion of the comprehensive pay opportunity that will be delivered only if the Company delivers positive performance for shareholders over a forward-looking three-year period.
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Although the vote on this proposal is not binding, the CMDS Committee, which is comprised solely of independent directors and is responsible for making decisions regarding the amount and form of compensation paid to the Company’s senior executives, will carefully consider the shareholder vote on this matter.
To help ensure that the range of shareholder views are well understood by the Board – in a way that a simple “for” or “against” vote does not allow – the Company also encourages shareholders to use any of a number of available direct communication mechanisms to effectively raise specific items with regard to our executive compensation practices.
The Company’s current policy is to provide shareholders with an opportunity to approve the compensation of the named executive officers, on an advisory basis, each year at the annual meeting of shareholders. It is expected that the next such vote will occur at the 2014 annual meeting of shareholders.
Our Board unanimously recommends that you vote“FOR” this proposal. Proxies solicited by the Board will be voted“FOR” this proposal unless otherwise instructed.
Item 4—Company Proposal to Amend the 2007 Equity Incentive Compensation Plan to Increase Shares Available for Grant
OUR BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THIS PROPOSAL.
Our Board adopted an amended and restated 2007 Equity Incentive Compensation Plan (EICP) was approved by shareholders on April 10, 2007. UponMarch 21, 2013, upon the recommendation of the CMDS Committee, on March 22, 2012, the Board adoptedCommittee. The EICP includes an amendment to the EICP to increase the number of shares of common stock available to be granted under the EICP by 5030 million shares. The proposed increase in shares and to extend the term of the EICP for an additional five years, subject to shareholder approval at the annual meeting of shareholders. This represents approximately 2.5%1.5% of the common shares of the Company outstanding as of January 31, 2012. February 28, 2013. The EICP was originally approved by shareholders on April 10, 2007.
Under NYSE rules, thethis amendment of the EICP will not be effective if our shareholders do not approve it. If this EICP amendment is approved, the Company expects to have sufficient shares for grants to be made over the next year and to return to shareholders to request approval of additional shares at the 2014 annual meeting of shareholders.
Morgan Stanley pays a significant portion of incentive compensation as equity awards, which aligns the interests of the Company’s employees with those of its shareholders. In recent years, the Company has fundamentally restructured the way it pays its employees and hasto more closely tiedtie compensation to the Company’s long-term financial performance by paying a more significant portion of year-end compensation in the form of deferred equity awards and significantly reducing the portion of year-end compensation paid as acurrent cash bonus. Furthermore, forIn prior years, the third year, the Company has paid senior executives a substantial portion of their incentive compensation in “at-risk” performance stock units that only deliver value if the Company meets specific performance targets after three years. In January 2013, the Company granted future-oriented, multi-year, long-term incentive program (LTIP) awards to senior executives that, like the previous performance stock units, will vest and convert to shares only if the Company achieves predetermined performance goals relating to return on average common shareholders’ equity and relative total shareholder return over a forward-looking three-year performance period.
The Board believes that this proposal is in the best interest of shareholders and supports this proposal for the following reasons:
In January 2013, approximately 55.6 million shares underlying equity awards were granted as part of the 2012 year-end compensation process and approximately 1.2 million shares (representing the target number of stock units) were granted as 2013 LTIP awards. Approximately 4.6% of these shares were granted to our NEOs.After these grants, as of February 28, 2013, approximately 34 million shares were available for future equity awards under the EICP and the Company’s legacy equity plans, with only 28.4 million of such shares available under the EICP. Given the significant portion of incentive compensation paid as equity awards, which is consistent with regulatory guidance and best practices, the relatively small number of shares currently available shares under the EICPCompany’s plans will not be sufficient for grants that would be made over the next year until the 20132014 annual meeting of shareholders.
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The Company strives to maximize employee and shareholder alignment, while minimizing dilution. Thus, the Company is requesting 40% fewer additional shares in 2013 (30 million) than in 2012, when we requested 50 million additional shares. Fewer additional shares are necessary in 2013 because the Company’s stock price as of March 18, 2013 (the 2013 record date) is approximately 15% higher than it was on March 19, 2012 (the 2012 record date), the Company has approximately 6,000 fewer employees at January 31, 2013 than it did at the beginning of 2012 and the Company had approximately 14 millionhas more shares available for future stock unit and restricted stock awards to employees, which include available shares undergrant as of February 28, 2013 than it did at the EICP as well as a relatively small numberbeginning of available shares under the Company’s legacy equity plans. If the EICP amendment is approved,2012. As in prior years, the Company expects to have sufficient shares for grants to be made over the next year and to return to shareholders to requestis requesting approval of additional shares at the 2013 annual meetingto cover only one-year of shareholders.
OUR BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE AMENDMENT OF THE EICP. Our Board believes that this proposal is in the best interest of our shareholders and supports this proposal for the following reasons, as discussed more fully below:
In recent years, Morgan Stanley has significantly increased the portion of pay that is deferred and a significant portion of deferred compensation is granted as equity awards. Additional shares are needed to continue this equity-based approach, which provides employees with long-term incentives that are aligned with shareholder interests and which is consistent with regulatory guidance and best practices.grant needs.
AsIf the proposed amendment to increase the number of January 31, 2012, the Company had approximately 13 million shares available under the EICP, and if the amendment of the EICP is not approved, the Company will be compelled to increase significantly the cash-based component of employee compensation.compensation, which is contrary to regulatory guidance and could reduce the alignment of employee and shareholder interests.
If the proposed amendment to increase the number of shares available under the EICP is not approved, the Company will lose a critical tool for recruiting, retaining and motivating employees. ItThe Company would thus be at a severe competitive disadvantage in attracting and retaining talent.
The terms of our EICP, ourequity and other annual equityand long-term incentive compensation awards and our employee policies are all designed to protect shareholder interests and encourage employees to focus on the long-term success of the Company.
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In recent years, Morgan Stanley has fundamentally restructured the way it pays its employees and has more closely tied compensation to the Company’s long-term financial performance. Morgan Stanley has significantly increased the portion of pay that is deferred and, for 2011, continued to grant a meaningful portion of year-end deferred compensation as equity awards to a broad group of employees. Of the shares underlying annual equity awards granted as part of 2011 incentive compensation, less than 3% were granted to our NEOs.
In addition, for the third year, we are paying senior executives in “at-risk” performance stock units from our EICP that only deliver value if the Company meets specific performance targets after three years. That means our senior executives have to earn these “at-risk” performance stock units twice and will not receive a payout on these performance stock units if the Company does not meet the specified ROE and relative TSR targets.
If shareholders do not approve the amendment of the EICP, the Company will be compelled to increase the cash-based portion of total compensation. This is contrary to regulatory guidance and will reduce the alignment of employee and shareholder interests. As part of the 2011 year-end compensation process, approximately 53 million shares underlying equity awards were granted. As of January 31, 2012, the Company had approximately 14 million shares available for future employee stock unit and restricted stock awards under the EICP and the Company’s legacy equity plans, which is not expected to be sufficient for the period until the next annual meeting of shareholders in 2013. Equity awards at Morgan Stanley are delivered as a component of – not in addition to – an employee’s total year-end incentive compensation and, thus, protect the interests of shareholders. If the amendment is not approved, the Company would be required to increase the portion of bonus paid in cash, which is not consistent with the Company’s pay philosophy and the principles set forth by regulators.
The Company would be at a severe competitive disadvantage in attracting and retaining talent if the amendment of the EICP is not approved, as equity awards are a critical recruitment and retention tool. The Company operates in an intensely competitive environment and our success is closely correlated with recruiting and retaining talented employees and a strong management team. A competitive compensation program that includes equity awards is therefore essential to the Company’s long-term performance. Our Board believes that equity awards are necessary to attract and retain highly talented employees. The Company would be at a severe competitive disadvantage if it could not compensate its employees using equity awards. If our shareholders do not approve the amendment of the EICP, our retention and recruiting efforts would be compromised due to the loss of equity as a form of compensation for employees.
The terms of our annual equity awards, of our employee policies and of our EICP are all designed to protect shareholder interests and encourage employees to focus on the long-term success of the Company.
The vesting and payment provisions of annual equity awards are determined by the CMDS Committee and are designed to encourage employees to focus on the long-term success of the Company because employeesEmployees typically cannot fully monetize annual equity awards until three years after grant. For example, RSUsrestricted stock units granted for 20112012 generally vest no sooner than 50% after two years, with the remaining 50% vesting afterover three years and generally convert to stock on the scheduled vesting dates. Furthermore, annual
The Company’s equity awards generally are subject to cancellation for, among other things, engaging in competitive activity, termination for cause, violating the Company’s compliance, ethics or risk management standards, soliciting clients or employees and misuse of proprietary information.
In 2011, the Company expanded its Equity awards are also subject to clawback provision to apply to equity awards, in addition to deferred cash-based awards. The clawback provision ensures that 2011 year-end compensation granted under the EICP can be canceled if an individual engagesfor, among other things, engaging in conduct (including with respect to direct supervisory responsibilities) detrimental to the Company, including causing a restatement of the Company’s consolidated financial results or violating the Company’s risk policies and standards.
As described above,The EICP expressly prohibits the Company is paying senior executives in “at-risk” PSUsgrant of stock option restoration rights and the repricing of stock options and stock appreciation rights (including any amendment to such awards that only deliver value ifhas the Company meets specific performance targets after three years. That means our senior executives will not
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Members of the Company’s Operating Committee are subject to an Equity Ownership Commitment policy that requires that they retain at least 75% of common stock and equity awards (less allowances for the payment of any option exercise price and taxes) made to them while they are on the Company’s Operating Committee. This commitment ties a portion of their net worth to the Company’s stock price and provides a continuing incentive for them to work towards superior long-term stock performance. Executives are also prohibited from engaging in hedging strategies, selling short or trading derivatives with the Company securities. In addition, all Management Committee members, as a condition to receiving annual equity or other incentive awards, signed a notice and non-solicitation agreement that generally requires, among other things, Management Committee members to provide the Company with 180 days advance notice of their resignation and not to solicit certain clients, customers or Company employees within 180 days following their termination of employment. Failure to comply with the agreement generally results inany cancellation of their equitysuch awards in exchange for cash or another award) other incentive awards granted for fiscal 2005 and subsequent years.than an equitable adjustment in connection with a corporate transaction.
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Our Board unanimously recommends that you vote ““FOR”” this proposal. Proxies solicited by the Board will be voted ““FOR”” this proposal unless otherwise instructed.
Summary of the EICP as Proposed to Be Amended.
A copy of the EICP as proposed to be amended is attached to this proxy statement as Annex A and the following summary is qualified in its entirety by reference thereto. Other than the amendment to the number of shares available under the EICP andfor which we are seeking approval under this Item 4, provisions related to the extensionaddition of qualifying long-term incentive awards, the termpayment of which is conditioned upon the EICPachievement of performance criteria for which we are seeking shareholder approval under Item 5 – Company Proposal to Amend the 2007 Equity Incentive Compensation Plan to Provide for Qualifying Performance-Based Long-Term Incentive Awards under Section 162(m), and the addition of certain administrative provisions for which shareholder approval is not required, the EICP terms remain unchanged. The capitalized terms not otherwise defined in this summary shall hashave the meaning assigned to them in the EICP.
Purposes and Eligibility.The primary purposes of the EICP are to attract, retain and motivate employees, to compensate them for their contributions to our growth and profits and to encourage them to own shares of our common stock to align their interests with those of shareholders. The EICP authorizes the issuance of awards (Awards) to all officers, other employees (including newly hired employees) and consultants of the Company, non-employee directors of our subsidiaries and employees and consultants of joint ventures, partnerships or
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similar business organizations in which we or one of our subsidiaries has an equity or similar interest (Eligible Individuals). As of DecemberJanuary 31, 2011,2013, there were approximately 62,00056,000 Eligible Individuals who were employees of the Company and its subsidiaries.
Administration. The CMDS Committee will administer the EICP, select the Eligible Individuals who receive Awards (Participants) and determine the form and terms of the Awards, including any vesting, exercisability, payment or other restrictions. Subject to certain limitations, the CMDS Committee may delegate some or all of its authority to one or more administrators (e.ge.g.., one or more CMDS Committee members or one or more of our officers).
Shares Available Under the EICP. TheSince initial shareholder approval of the EICP in 2007, the total number of shares of common stock that may be delivered pursuant to Awards will be 248278 million (which takes into account the proposed 5030 million share increase), of which approximately 185220 million were already granted as of January 31, 2012,February 28, 2013, subject to adjustment pursuant to the EICP’s share counting rules as described below and to reflect certain transactions. Shares delivered under the
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EICP may be either treasury shares or newly issued shares. In addition to the overall limit, the EICP limits the number of shares of common stock that may be subject to stock option and stock appreciation right (SAR) awards in any single year.
Share Counting Rules. When the CMDS Committee grants an Award, the full number of shares subject to the Award is charged against the number of shares that remain available for delivery pursuant to Awards. After grant, the number of shares subject to any portion of an Award that is canceled or that expires without having been settled in shares, or that is settled through the delivery of consideration other than shares, will be available for new Awards. If shares are tendered or withheld to pay the exercise price of an Award or to satisfy a tax withholding obligation, those tendered or withheld shares will be available for new Awards. Awards granted upon assumption of, or in substitution for, outstanding awards previously granted by, or held by employees of, a company or other entity or business acquired (directly or indirectly) by the Company or with which the Company combines are not counted against the number of shares of common stock available for delivery pursuant to Awards and are not subject to the individual limit on stock options and SARs.
Awards Generally.Generally.
Form of Awards.The EICP authorizes the following Awards: (i) restricted stock Awards consisting of one or more shares of common stock granted or sold to a Participant; (ii) stock unit Awards settled in one or more shares of common stock or, as authorized by the CMDS Committee, an amount in cash based on the fair market value of shares of common stock; (iii) stock option Awards consisting of the right to purchase at a specified exercise price a number of shares of common stock determined by the CMDS Committee; (iv) SARs consisting of the grant of a right to receive upon exercise of such right, in cash or common stock (or a combination thereof) as determined by the CMDS Committee, an amount equal to the increase in the fair market value of a share of common stock over the specified exercise price; (v) Qualifying Performance Awards to participants covered by Section 162(m), with the intent that such awards qualify as “performance-based compensation” under Section 162(m) and (v)(vi) other forms of equity-based or equity-related Awards that the CMDS Committee determines to be consistent with the purposes of the EICP (Other Awards). Awards under the EICP may, at the discretion of the CMDS Committee, be made in substitution in whole or in part for cash or other compensation payable to an Eligible Individual.
Dividends and Distributions.Distributions. If we pay any dividend or make any distribution to holders of our common stock, the CMDS Committee may in its discretion authorize payments (which may be in cash, common stock (including restricted stock) or stock units or a combination thereof) with respect to the shares of common stock corresponding to an Award, or may authorize appropriate adjustments to outstanding Awards, to reflect the dividend or distribution. The CMDS Committee may make any such payments subject to vesting, deferral, restrictions on transfer or other conditions. Dividends are not paid on stock options or SARs.
Restricted Stock and Stock Units. Restricted shares awarded or sold to a Participant are outstanding shares of common stock that the CMDS Committee may subject to restrictions on transfer, vesting requirements or
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cancellation under specified circumstances. Each stock unit awarded to a Participant corresponds to one share of common stock and the CMDS Committee may subject the award to vesting requirements or cancellation under specified circumstances. Upon satisfaction of the terms and conditions of a stock unit Award, applicable stock units will be payable, at the discretion of the CMDS Committee, in common stock or in cash equal to the fair market value on the payment date of one share of common stock. As a holder of stock units, a Participant will have only the rights of a general unsecured creditor of the Company. A Participant will not be a shareholder with respect to the shares underlying stock units unless and until the stock units convert to shares of common stock.
Stock Options and SARs.SARs.
General. Stock options may be either nonqualified stock options or incentive stock options (ISOs). Upon satisfaction of the conditions for exercisability, a Participant may exercise a stock option and receive the number of shares of common stock in respect of which the stock option is exercised. Upon satisfaction of the conditions for payment, each SAR will entitle a Participant to an amount, if any, equal to the amount by which the fair market value of a share of common stock on the date of exercise exceeds the SAR exercise price. At the discretion of the CMDS Committee, SARs may be payable in common stock, cash or a combination thereof. |
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Exercise Price. Price. The exercise price of stock options and SARs awarded under the EICP may not be less than 100% of the fair market value of one share of common stock on the award date; however, the exercise price per share of a stock option or SAR that is granted in substitution for an award previously granted by an entity acquired by the Company or with which the Company combines may be less than the fair market value per share on the award date if such substitution complies with applicable laws and regulations.
Prohibition on Repricing of Stock Options and SARs. SARs. The CMDS Committee may not “reprice” any stock option or SAR or make any other amendment to a stock option or SAR that has the effect of reducing its exercise price or cancel a stock option or SAR in exchange for cash or another Award, unless the repricing occurs in connection with a merger, acquisition, spin-off or other similar corporate transaction. An equitable adjustment to reflect a corporate transaction is not a prohibited repricing.
Prohibition on Restoration Option Grants. and SAR Grants. The terms of a stock option or SAR may not provide for a new stock option or SAR to be granted, automatically and without payment of additional consideration in excess of the exercise price of the underlying stock option or SAR, to a Participant upon exercise of the stock option.option or SAR.
Individual Limit on Stock Options and SARs.SARs. The maximum number of shares of common stock that may be subject to stock options or SARs granted to or elected by a Participant in any fiscal year will be 2,000,000 shares. This limitation does not apply to shares of common stock subject to stock options or SARs granted to a Participant pursuant to any performance formula or performance measures approved by the Company’s shareholders pursuant to Section 162(m).
Maximum Term on Stock Options and SARs. SARs. No stock option or SAR may have an expiration date that is later than the tenth anniversary of the Award date.
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ISO Limit. The full number of shares of common stock available for delivery under the EICP may be delivered pursuant to ISOs, except that in calculating the number of shares that remain available for ISOs, certain share counting provisions will not apply.
Qualifying Performance Awards. Please see the discussion in Item 5 “– Summary of the Material Terms of the Performance Goals under the EICP as Proposed to be Amended” regarding performance-based awards that are intended to qualify for tax deductibility under Section 162(m). These awards are intended to be granted to any individual designated by the CMDS Committee by not later than 90 days following the start of the relevant performance period (or such other time as may be required or permitted by Section 162(m)) as an individual whose compensation for such fiscal year may be subject to the limit on deductible compensation imposed by Section 162(m).
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Other Awards. The CMDS Committee may establish the terms and provisions of other forms of equity-based or equity-related Awards not described above that the CMDS Committee determines to be consistent with the purpose of the EICP and the interests of the Company.
Awards to Section 162(m) Participants. Except for grants of stock options and SARs, which are counted against the individual limit described above, all Awards to a Participant who is designated by the CMDS Committee as an individual whose compensation may be subject to the limit on deductible compensation imposed by Section 162(m) will be made pursuant to a performance formula or performance goals approved by the Company’s shareholders pursuant to Section 162(m).
Transferability. Unless otherwise permitted by the CMDS Committee, no Award will be transferable other than by will or by the laws of descent and distribution. During the lifetime of a Participant, an ISO will be exercisable only by the Participant.
Amendment and Termination. The Board or the CMDS Committee may modify, amend, suspend or terminate the EICP in whole or in part at any time and may modify or amend the terms and conditions of any outstanding Award. However, no modification, amendment, suspension or termination may materially adversely affect a Participant’s rights with respect to any Award previously made without that Participant’s consent, except that the CMDS Committee may at any time, without a Participant’s consent, amend or modify the EICP or any Award under the EICP to comply with law, accounting standards, regulatory guidance or other legal requirements. The CMDS Committee may create subplans as may be necessary or advisable to comply with non-U.S. legal or regulatory provisions. Notwithstanding the foregoing, neither the Board nor the CMDS Committee may
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accelerate the payment or settlement of any Award that constitutes a deferral of compensation for purposes of Section 409A of the Internal Revenue Code except to the extent the acceleration would not result in a Participant incurring interest or additional tax under Section 409A.
Term. No Awards may be made after May 15, 2017.
Section 162(m) of the Internal Revenue Code. Section 162(m) limits the federal income tax deduction for compensation paid to the Chief Executive Officer and the three other most highly compensated executive officers (other than the Chief Financial Officer) of a publicly held corporation to $1 million per fiscal year, with exceptions for certain performance-based compensation. Such performance-based compensation may consist of awards determined by the CMDS Committee under a formula or performance criteria approved by the Company’s shareholders. Our shareholders approved the formula governing annual incentive compensation currently used by the CMDS Committee at our annual meeting on March 22, 2001. The Company2001 and is not seeking to changeamend the current formula.existing formula (please see Item 6 of this proxy statement). Awards of stock options or SARs determinedgranted by the CMDS Committee under the EICP will also qualify for the performance-based compensation exception to Section 162(m). If Item 5 is approved by shareholders, then qualifying performance-based long-term incentive awards will also qualify for the performance-based compensation exception to Section 162(m).
EICP Benefits. Awards under the EICP will be authorized by the CMDS Committee in its sole discretion. Therefore, it is not possible to determine the benefits or amounts that will be received by any particular employees or group of employees in the future or that would have been received in 20112012 had the amendment of the EICP then been in effect.
U.S. Federal Income Tax Consequences. The following is a general summary as of the date of this proxy statement of the U.S. federal income tax consequences associated with the EICP. The federal tax laws are complex and subject to change and the tax consequences for any Participant will depend on his or her individual circumstances.
Stock Units. A Participant who receives stock units |