The Director Compensation Project: Morgan Stanley

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2009’s Fortune 100 and using information found in their 2009 proxy statements. In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence. While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii). This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation. Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also know as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Morgan Stanley’s (MS-NYSE) 2009 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

Name*	Fees Earned or Paid in Cash ($)	Stock Awards ($)	All Other Compensation ($)	Total ($)
Roy J. Bostock	85,000	250,000	-	335,000
Erskine B. Bowles	85,000	250,000	-	335,000
Howard J. Davies	90,000	250,000	-	340,000
C. Robert Kidder	125,000	250,000	-	375,000
Donald T. Nicolaisen	100,000	250,000	-	350,000
Charles H. Noski	105,000	250,000	-	355,000
Hutham S. Olayan	85,000	250,000	-	335,000
Charles E. Phillips, Jr.	90,000	250,000	-	340,000
O. Griffith Sexton	75,000	250,000	-	325,000
Laura D. Tyson	95,000	250,000	-	345,000

* On October13, 2008, Morgan Stanley issued to Mitsubishi UFJ Financial Group, Inc. (MUFG) 7,839,209 shares of Series B Non-Cumulative Non-Voting Perpetual Convertible Preferred Stock and 1,160,791 shares of Series C Non-Cumulative Non-Voting Perpetual Preferred Stock for an aggregate purchase price of $9 billion. In connection with such issuance, Morgan Stanley entered into an Investor Agreement with MUFG dated as of October13, 2008 (Investor Agreement), whereby Morgan Stanley agreed to take all lawful action to cause one of MUFG’s senior officers or directors to be a member of Morgan Stanley’s Board of Directors. Pursuant to the terms of the Investor Agreement, the Board increased the size of the Board from eleven (11)to twelve (12)directors and elected Mr.Nobuyuki Hirano to the Board effective March10, 2009.

Director Compensation. Morgan Stanley’s board met twenty-eight times in 2008. All directors attended at least 75% of the board meetings. Each director received base retainers of $75,000, supplemented by additional retainers for serving as a lead director ($30,000), board committee chair ($20,000-$30,000), or board committee member ($10,000-$15,000). Of the eleven directors, all but two received between $75,000 and $105,000 in cash compensation. Additionally, each director received $250,000 in stock awards, half of which is only payable on the director’s retirement from the Board. Non-employee directors averaged $343,500 in total compensation.

Director Tenure. Only two of the twelve active directors served on the board prior to 2004. Mr. Kidder, who serves as the lead director, has the longest tenure, serving on the board since 1993. Ms. Sexton is the second-longest, joining the Board in 1997. Several directors also sit on other boards. Donald Nicholaisen, a director since 2006, also sits on the boards of MGIC Investment Corporation, Verizon Communications, and Zurich Financial Services. Charles Noski, a Board member since 2005, also serves as a director for Microsoft Corporation, Air Products and Chemicals, Inc., and Automatic Data Processing, Inc.

CEO Compensation. John Mack, who serves as Chairman and CEO, received $1,235,097 in total compensation for 2008. Mr. Mack received $800,000 as base cash salary and $6,100 in 401(k) matching contributions; however, for both 2007 and 2008, he did not receive a bonus. As directed by the Board, Mr. Mack used the corporate jet for his personal travel needs at a value of $368,675. On March 10, 2009, he announced he would reimburse Morgan for his personal use of company aircraft, up to the amount allowed by FAA regulations. Also, Morgan Stanley paid $46,520 for his personal security and an undisclosed amount for use of a company car.

The firm’s two highest-paid officers were Mr. Kelleher and Mr. Lynch, neither of whom served as CEO. Colm Kelleher, the CFO, received $7,442,682 in total compensation in 2008; he received only $322,903 in salary, but $3,970,219 was in bonuses and $728,122 in stock awards. In addition, because he is covered by Morgan Stanley’s overseas reimbursement policy, he received $2,196,369 under the policy, including housing expenses, tax reimbursements and tax equalization payments, financial advisory and tax planning services, reimbursement for educational costs, and cost of living adjustments. Though Mr. Kelleher’s total compensation is the firm’s highest for 2008, it is down from $21,015,689 in total compensation he received in 2007.

Gary Lynch, the Chief Legal Officer, received $4,017,611 in total compensation for 2008. While Lynch received only $300,000 in salary, he received $3,169,000 in bonus payments. Like Mr. Kelleher, Mr. Lynch’s 2008 earnings, while high, pale in comparison to the $11,899,964 he earned in 2007.