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Most Influential CEOs: Morgan Stanley's John Mack Rejects Bonus, Sets Trend


The banker established a new tone on Wall Street, even if pay remains a hot-button issue.

In December 2006, Morgan Stanley (MS) head John Mack received a bonus of $40 million in the form of restricted stock -- at the time, the largest ever for a Wall Street chief executive. (Goldman Sachs's (GS) Lloyd Blankfein outdid him with a $53.4 million bonus a week later.) It was a record year for Morgan Stanley, but those profits were illusory, the last gasp of the housing bubble which would in short order bring Morgan Stanley to the brink.

One year later, Morgan Stanley began reporting losses on its subprime loans, and Mack decided to forgo a bonus. He departed as CEO at the beginning of 2010 -- he remains the chairman of the board -- but hasn't taken a bonus the last three years. He was still paid an annual salary of $800,000, and, obviously, received lavish compensation in 2005 ($25 million bonus) and in 2006.

But Mack's decision in 2007 set the precedence for Wall Street top executives. He saw the tea leaves and decided to meet the widespread anger over Wall Street's bonuses. This might be one small reason why Goldman Sachs, and not Morgan Stanley, is the more vilified face of Wall Street excess.

In hindsight, Mack's decision seems like a no-brainer. But one must consider the climate of the time, when, at least in 2007, the financial crisis hadn't reached its apotheosis yet. Among investment banks, like rivals Bear Stearns (JPM) and Lehman Brothers, the good times didn't seem as if they were in jeopardy. Hence, in 2008, when the collapse had consumed many institutions, Mack could point to his previous decision to forgo a bonus as appropriate.

In addition, in December 2008, Mack enacted changes to the bonus system at Morgan Stanley. Some of employees' year-end cash bonuses were subjected to a "clawback provision" that would allow the company to take back the money "if the individual engages in conduct detrimental to the firm." The compensation for senior executives would also be tied to the firm's performance over a three-year period.

As Mack said last December in a memo sent to Morgan Stanley employees, his decision to decline a bonus for the third consecutive year was the result of "this unprecedented environment and the extraordinary financial support governments provided to our industry."

Morgan Stanley received aid through the TARP and repaid the $10 billion it owed to the government last June. Then and now, Mack has called for efforts to better align executive compensation with long-term performance.

At a recent event, he said Wall Street overpays its bankers but would continue to do so unless Washington acts. "I still don't think the industry gets it," he said. "The issue is not structure, it is amount."

The son of Lebanese immigrants, Mack grew up in North Carolina and attended Duke University on a football scholarship. He became a bond trader at Morgan Stanley in 1972 and moved his way up to become president in 1993. He was forced out by Philip Purcell in a power struggle in 2001, and then returned four years later to replace Purcell as CEO.

Mack's legacy may well be his original decision to decline a cash or stock bonus. That said, Mack will ultimately be rewarded in other ways. Morgan Stanley's IOUs to Mack -- known as restricted stock units, or RSUs -- jumped in value to $43.3 million from $27.2 million in 2009.

For the time, at least, Mack's philosophy has been quarantined to the upper echelon of Wall Street. While many chief executives took a pay cut for 2009, the foot soldiers on Wall Street raked in the bonuses. Leading firms paid out $140 billion in compensation and benefits, the largest amount in history. (The 2008 figure was $123 billion and $137 billion in 2007.)

It's that type of window dressing that Mack, still in a position of power on Wall Street, might want to address next.

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