July 6, 2005

Where 25 Million Is Merely Average


Even for a Wall Street legend, it pays to be average.

John J. Mack, who was named Morgan Stanley's chairman and chief executive last Thursday, has agreed to a five-year contract that will pay him as much as $25 million a year for the next year and a half - or in the me-too meritocracy of Wall Street, at least as much as the average of his high-paid peers.

The compensation package is expected to vault him ahead of the $22.5 million pay package that his predecessor, Philip J. Purcell, took home last year. Still, it is about the same that the average chief executive of a big investment bank has received over the last three years. It is also less than the $27.8 million Mr. Mack was paid as president of Morgan Stanley in 2000 - near the height of the dot-com boom - his last full year at the company, before he was forced out in a power struggle with Mr. Purcell.

Executive compensation specialists said the pay package reflected the unusual circumstances of his return to Morgan Stanley. The board determined that Mr. Mack, 60, was the executive best qualified to calm the turmoil in the firm, stabilize the business and revive the stock price.

So the compensation may reflect Mr. Mack's leverage at the negotiating table as much as anything else.

Even if he fails over the next two years, he is guaranteed to make at least as much as his peers.

"It's not exactly pay for performance," said Donald Delves, president of the Delves Group, an executive compensation consulting firm based in Chicago. "It's the package that they felt they needed to do in order to get him."

Mr. Mack's contract at Morgan Stanley runs through 2010; the minimum compensation guarantee is valid only until 2006.

Beginning then, he will receive a minimum salary of $775,000, perks like access to chauffeured cars and a corporate jet, and an annual bonus and long-term performance award will be determined by the board, based on the company's results.

When Mr. Mack resigned from Morgan Stanley in January 2001, he was the company's largest individual investor with $640 million worth of stock. Now, he will also receive a one-time grant of 500,000 shares of restricted stock that will be available for sale in equal installments over the next five years. On the basis of yesterday's market price of $53.77, that was worth some $26.9 million.

In a slightly unusual twist, Mr. Mack will be credited with four years of additional service. This means that in terms of his pension benefits, it will be as if he had never left the firm.

Of course, Mr. Mack's pay, while rich, may lag behind that of some of his peers. According to the terms of his agreement, he is entitled to the average salary, bonus and long-term performance awards of the chief executives at Bear Stearns, Merrill Lynch, Lehman Brothers and Goldman Sachs. If, on average, they earn more than $25 million, Mr. Mack's compensation is limited to that amount.

This could indeed be the outcome, given the results of last year. E. Stanley O'Neal, Merrill Lynch's chief executive, was Wall Street's highest-paid chief executive last year with a compensation package worth $32 million, largely in restricted stock. Henry Paulson, 59, Goldman's chief executive, was the second-biggest earner, with about $29.8 million, most of it in restricted stock. Richard S. Fuld Jr., 59, the chief executive of Lehman Brothers, who made $26.3 million last year, was next, followed by James E. Cayne, 71, Bear Stearns 's chief executive, who took home $24.7 million.

But Mr. Mack may have to be content accepting the average. Over the last three years, this handsomely paid group of executives has earned an average of $22.8 million a year, according to an analysis of company proxies by Equilar, a compensation research firm based in San Mateo, Calif.

"It guarantees he is going to be treated as well as his peers, up to a point," Mr. Delves said. "He is walking into a tough situation, and he is saying, 'I don't want to lose.' "

Of course on Wall Street, even the losers can win. According to company filings, Mr. Purcell, who announced on June 13 that he would retire after a revolt against his leadership, leaves Morgan Stanley with retirement benefits and stock awards worth more than $62.3 million.


Copyright 2005 The New York Times Company