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April 5, 2012

 

Fellow shareholder:

 

I cordially invite you to attend Morgan Stanley’s 2012 annual meeting of shareholders that will be held on Tuesday, May 15, 2012 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 and other developments in the last year. Your vote is very important. Whether or not you plan to attend the meeting, please vote promptly to ensure that your shares are represented.

 

Thank you for your support of Morgan Stanley.

 

Very truly yours,

 

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James P. Gorman
Chairman and Chief Executive Officer


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1585 Broadway

New York, NY 10036

 

Notice of 2012 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. (Eastern time) on May 15, 2012
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 amendment of the 2007 Equity Incentive Compensation Plan

 

•    Approve the amendment of the Directors’ Equity Capital Accumulation Plan

 

•    Approve the compensation of executives as disclosed in the proxy statement (non-binding advisory resolution)

 

•   Transact such other business as may properly come before the meeting or any postponement or adjournment thereof

Record Date    March 19, 2012
Admission    Only record or beneficial owners of Morgan Stanley’s common stock or their proxies may attend the annual meeting in person. All shareholders must present photo identification, such as a driver’s license, and beneficial owners must also provide evidence of stock holdings, such as a recent brokerage account or bank statement.
Webcast    If you are unable to attend the meeting in person, you may listen to the meeting at www.morganstanley.com/about/ir/index.html. Please go to our website prior to the annual meeting for details.
Voting    It is important that you vote all of your shares. You may vote over the Internet or by telephone. You may also submit a proxy card or voting instruction form if you receive one in the mail.
Notice    We are mailing certain shareholders a Notice of Internet Availability of Proxy Materials (“Notice”) on or about April 5, 2012. The Notice informs those shareholders how to access this proxy statement and our Annual Report for the year ended December 31, 2011 through the Internet and how to vote online.

 

Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to Be Held on May 15, 2012: Our Proxy Statement and our Annual Report on Form 10-K for the year ended December 31, 2011 are available free of charge on our website at www.morganstanley.com/2012ams.

 

By Order of the Board of Directors,
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Martin M. Cohen
Corporate Secretary
April 5, 2012


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Item 1—Election of Directors

     1   

Director Selection and Nomination Process

     1   

Director Experience, Qualifications, Attributes and Skills

     2   

Director Nominees

     2   

Corporate Governance

     9   

Corporate Governance Policies

     9   

Director Independence

     10   

Director Attendance at Annual Meeting

     12   

Board Meetings and Committees

     12   

Board Leadership Structure and Role in Risk Oversight

     14   

Director Compensation

     16   

Related Person Transactions Policy

     18   

Certain Transactions

     19   

Beneficial Ownership of Company Common Stock

     20   

Executive Equity Ownership Commitment

     20   

Director Career Stock Unit Holding Requirement

     20   

Stock Ownership of Executive Officers and Directors

     20   

Principal Shareholders

     22   

Section 16(a) Beneficial Ownership Reporting Compliance

     22   

Executive Compensation

     23   

Compensation Governance

     23   

Consideration of Risk Matters in Determining Compensation

     24   

Compensation Discussion and Analysis

     26   

Compensation, Management Development and Succession Committee Report

     39   

2011 Summary Compensation Table

     39   

2011 Grants of Plan-Based Awards Table

     42   

2011 Outstanding Equity Awards at Fiscal Year-End Table

     45   

2011 Option Exercises and Stock Vested Table

     47   

2011 Pension Benefits Table

     47   

2011 Nonqualified Deferred Compensation Table

     49   

Potential Payments Upon Termination or Change-in-Control

     53   

Item 2—Ratification of Appointment of Morgan Stanley’s Independent Auditor

     56   

Item 3—Company Proposal to Amend the 2007 Equity Incentive Compensation Plan

     59   

Item 4—Company Proposal to Amend the Directors’ Equity Capital Accumulation Plan

     67   

Item  5—Company Proposal to Approve the Compensation of Executives as Disclosed in the Proxy Statement (Non-Binding Advisory Resolution)

     70   

Information About the Annual Meeting

     72   

Other Business

     75   

Annex A: Morgan Stanley 2007 Equity Incentive Compensation Plan (As Proposed to be Amended)

     A-1   

Annex B: Morgan Stanley Directors’ Equity Capital Accumulation Plan (As Proposed to be Amended)

     B-1   


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Morgan Stanley

 

1585 Broadway

New York, New York 10036

 

April 5, 2012

 


Proxy Statement

 


 

We are sending you this proxy statement in connection with the solicitation of proxies by our Board of Directors for the 2012 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.

 

Item 1—Election of Directors

 

Director Selection and Nomination Process

 

Our Board currently has 13 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 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. Masaaki Tanaka as a representative director under the Investor Agreement, and Mr. Tanaka was elected by shareholders at the 2011 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 a Corporate Governance Policy that provides 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:

 

Regulatory

Public Accounting and Financial Reporting

Finance

Risk Management

Business Development

 

Operations

Strategic Planning

Management Development and Succession

Compensation

Corporate Governance

 

Public Policy

International Matters

Banking

Financial Services

 

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.

 

Director Nominees

 

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 Board has nominated the 13 director nominees below for election at the 2012 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 Mr. Klaus Kleinfeld as a potential director candidate to the Nominating and Governance Committee. The Board unanimously nominated Mr. Kleinfeld for election at the annual meeting of shareholders.

 

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Roy J. Bostock (71)

Director Since 2005

  

Professional Experience:

• Mr. Bostock has served as non-executive Vice Chairman of the Board of Delta Air Lines, Inc. since 2009 and Chairman of the Board of Yahoo! Inc. since 2008.

• He has served as a principal of Sealedge Investments, LLC, a diversified private investment company, since 2002.

• Mr. Bostock is Chairman Emeritus, and served as Chairman from 2002 to 2010, of the Partnership for a Drug-Free America and served as Chairman of the Committee for Economic Development from 2002 to 2005.

• He worked in the advertising agency business for 38 years beginning in 1964.

• Mr. Bostock was Chairman of B|Com3 Group, Inc., now part of the Publicis Groupe S.A., from 2000 to 2001.

• He also served as Chairman and Chief Executive Officer of D’Arcy, Masius Benton & Bowles and its successor firm, The MacManus Group, Inc., from 1990 to 2000, when The MacManus Group, Inc. merged with the Leo Burnett Company to form B|Com3 Group, Inc., and was President from 1986 to 1990 of D’Arcy, Masius Benton & Bowles.

 

Other Current Directorships:    Delta Air Lines, Inc. (Non-Executive Vice Chairman) and Yahoo! Inc. (Non-Executive Chairman; announced that he is not standing for re-election)

 

Other Directorships in the Past Five Years:    Northwest Airlines Corporation (prior to its merger with Delta Air Lines, Inc.)

 

Qualifications, Attributes and Skills:    Mr. Bostock’s varied leadership positions, including as chief executive officer of advertising and marketing services firms and in connection with non-profit organizations and public company boards, brings to the Board the perspective of an experienced leader with strategic planning, operations and business development skills.

    

 

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Erskine B. Bowles (66)

Director Since 2005

  

 

Professional Experience:

• Mr. Bowles has been President Emeritus of the University of North Carolina since 2011 and served as President from 2006 through 2010.

• He served as Co-Chair of the National Commission on Fiscal Responsibility and Reform through 2010.

• Mr. Bowles has been a senior advisor at BDT Capital Partners LLC, a private investment firm, since 2012. He has been a senior advisor since 2001 and was Managing Director from 1999 to 2001 of Carousel Capital LLC, a private investment firm. He was also a partner at the private investment firm of Forstmann Little & Co. from 1999 to 2001 and was a founder of Kitty Hawk Capital, a venture capital firm.

• He began his career in corporate finance at Morgan Stanley in 1969 and subsequently helped found and served as Chairman and Chief Executive Officer of Bowles Hollowell Connor & Co., an investment banking firm.

• 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., Cousins Properties Incorporated, Facebook, Inc. and Norfolk Southern Corporation

 

Other Directorships in the Past Five Years:    General Motors Corporation

 

Qualifications, Attributes and Skills:    Mr. Bowles brings to the Board his extensive experience in the financial services industry and academia as well as distinguished public service.

 

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Howard J. Davies (61)

Director Since 2004

  

Professional Experience:

• Mr. Davies has served as a professor at SciencesPo, the Paris School of International Affairs since 2011.

• He is an external advisor to the Government Investment Corporation of Singapore and a member of the International Advisory Board of the China Securities Regulatory Commission.

• 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 & Co. from 1982 to 1987 and was seconded to the Treasurer as Special Advisor to the Chancellor of the Exchequer. Mr. Davies also previously worked at the U.K. Treasury and the Foreign and Commonwealth Office, including two years as Private Secretary to the British Ambassador in Paris.

 

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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James P. Gorman (53)

Director Since 2010

  

 

Professional Experience:

• Mr. Gorman has served as Chairman of the Board since 2012, President and Chief Executive Officer of Morgan Stanley since 2010, and Chairman of Morgan Stanley Smith Barney Holdings LLC since 2009.

• He was Co-President of Morgan Stanley from 2007 to 2009, Co-Head of Strategic Planning from 2007 to 2009 and President and Chief Operating Officer of the Global Wealth Management Group from 2006 to 2008.

• Mr. Gorman joined Merrill Lynch & Co., Inc. 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 & Co., serving in the firm’s financial services practice. Earlier in his career, Mr. Gorman was an attorney in Australia.

 

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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C. Robert Kidder (67)

Director 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 and Schering-Plough Corporation (prior to its merger with Merck & Co. Inc.)

 

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 (54)

Director Nominee

  

 

Professional Experience:

• Mr. Kleinfeld has served as Chairman and CEO of Alcoa Inc., a producer and manager of primary aluminum, fabricated aluminum and alumina, since 2010.

• He served as President and CEO from 2008 to 2010 and President and Chief Operating Officer from 2007 through 2008 of Alcoa.

• Mr. Kleinfeld served for 20 years at Siemens AG from 1987 to 2007, including as CEO and President from 2005 to 2007, a member of the Managing Board from 2004 to 2007, and as President and Chief Executive Officer from 2002 to 2004 and Executive Vice President and Chief Operating Officer in 2001 of Siemens AG’s principal U.S. subsidiary, Siemens Corporation.

• He serves on the Brookings Institution Board of Trustees and is Chairman of the U.S.-Russia Business Council.

 

Other Current Directorships:    Alcoa, Inc. and Bayer AG (Supervisory Board)

 

Other Directorships in the Past Five Years:    Siemens AG (Managing Board) and Citigroup Inc.

 

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 (67)

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 Financial Services

 

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.

 

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Hutham S. Olayan (58)

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 has been President and Chief Executive Officer of The Olayan Group’s U.S. operations for more than 20 years, overseeing all investment activity in the Americas.

• 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 (66)

Director Since 2011

  

Professional Experience:

• Mr. Owens served as Chairman and Chief Executive Officer of Caterpillar Inc., 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 Inc. from 2003 to 2004 and as Group President from 1995 to 2003, responsible at various times for 13 of the company’s 25 divisions.

• Mr. Owens served at Caterpillar Inc. as Vice President and Chief Financial Officer from 1993 to 1995, Corporate Vice President and President of Solar Turbines Incorporated from 1990 to 1993, and managing director of P.T. Natra Raya, Caterpillar Inc.’s Indonesian joint venture, from 1987 to 1990.

• 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. Mr. Owens joined Caterpillar Inc. in 1972 as a corporate economist.

• He served on the President’s Economic Recovery Advisory Board from 2009 to 2011. Mr. Owens serves on the boards of the Peter G. Peterson Institute for International Economics and the Council on Foreign Relations and is a senior advisor at Kohlberg Kravis Roberts & Co.

 

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 strengthens the Board’s global perspective.

 

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O. Griffith Sexton (68)

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 (64)

Director Since 2011

  

Professional Experience:

•   Mr. Tamakoshi has served as a Senior Advisor of The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU) since 2010.

•   Mr. Tamakoshi served as Chairman of MUFG from 2005 to 2010 and as Deputy Chairman of The Bank of Tokyo-Mitsubishi UFJ, Ltd. from 2006 to 2008. Before the merger between Mitsubishi Tokyo Financial Group and UFJ Holdings, Mr. Tamakoshi was President and Chief Executive Officer of UFJ Holdings, Inc. and also Chairman of UFJ Bank, Ltd.

•   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:    Mitsubishi UFJ Financial Group, Inc.

 

Qualifications, Attributes and Skills:    As a senior officer advisor to BTMU and as former Chairman of Mitsubishi UFJ Financial Group, Inc., Mr. Tamakoshi brings to the Board over 40 years of banking experience and international, risk management and strategic expertise.

 

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Masaaki Tanaka (59)

Director Since 2011

  

 

Professional Experience:

•   Mr. Tanaka has served as Resident Managing Officer for the United States for MUFG since June 2011 and has served as the Senior Managing Executive Officer and Chief Executive Officer for the Americas of BTMU since 2011.

•   He served as Managing Executive Officer and Chief Executive Officer for the Americas of BTMU from 2010 to 2011. In 2007, he was named a Managing Executive Officer of BTMU.

•   From 2007 to 2010, Mr. Tanaka was President and Chief Executive Officer of UnionBanCal Corporation and its primary subsidiary, Union Bank, N.A., where he continues to serve as a director.

•   Following the merger of The Bank of Tokyo-Mitsubishi, Ltd. (BTM) and UFJ Bank, Ltd., which created BTMU, Mr. Tanaka served as Executive Officer and General Manager of the Corporate Planning Division for the newly combined bank from 2006 to 2007.

•   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:    UnionBanCal Corporation

 

Qualifications, Attributes and Skills:    As a senior officer of BTMU and its associated companies, Mr. Tanaka brings to the Board over 35 years of banking experience and international, risk management and strategic expertise.

 

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Laura D. Tyson (64)

Director Since 1997

  

Professional Experience:

•   Dr. Tyson has served as the S. K. and Angela Chan Professor of Global Management since 2008 and served as Professor of Business Administration and Economics from 2007 to 2008 at the Walter A. Haas School of Business, University of California, Berkeley.

•   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 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.

•   She also serves on the Peter G. Peterson Institute of International Economics.

 

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 Skills:    Dr. Tyson brings to the Board economics and public policy expertise and leadership skills from her positions in academia and through her distinguished public service.

 

Our Board unanimously recommends a vote “FOR” the election of all director nominees.

 

Corporate Governance

 

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;

 

Lead independent director is appointed, and reviewed annually, by the other independent directors; and

 

Board policy favors committee chair and lead director rotation.

 

Corporate Governance Policies

 

Morgan Stanley has a corporate governance webpage at morganstanley.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 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 2013 annual meeting of shareholders, recommendations must be submitted in accordance with the policy by December 7, 2012.

 

 

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.

 

Director Independence

 

The Board has determined that Messrs. Bostock, Bowles, Davies, Kidder, Kleinfeld and Nicolaisen, Ms. Olayan, Messrs. Owens and Sexton, and Ms. 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.

 

To assist the Board with its determination, the 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. Ten of 13 of our current directors are independent. Upon the election of the current slate of director nominees, 10 of our 13 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 relationships in 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’s contributions to charitable organizations where the directors or their immediate family members serve as officers, directors or trustees that did not exceed the greater of $100,000 or 1% of the organization’s consolidated gross revenues in the preceding year

 

  Bostock, Bowles, Davies, Hance, Kidder, Kleinfeld, Olayan and Owens
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, 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 involved in any discussions or decisions regarding the restructuring; that the Company has ceased to have an equity interest in FrontPoint; Mr. Bostock’s son-in-law is no longer an employee of the Company as of March 1, 2011; and any future commercial activities with FrontPoint will be in the ordinary course of business and on substantially the same terms as those prevailing at the time for comparable services for unaffiliated third parties. 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 of the current directors who were on the Board at the time attended the 2011 annual meeting of shareholders. One of the 13 directors on the Board of Directors at the time of the 2011 annual meeting of shareholders was not standing for re-election and did not attend the meeting.

 

Board Meetings and Committees

 

Our Board met 15 times during 2011. Each director attended at least 75% of the total number of meetings of the Board and committees on which the director served that were held during 2011 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 2011 are set forth below. Charters for each of our standing committees are available at our corporate governance webpage.

 

All members of the Audit Committee, the Compensation, Management Development and Succession 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. 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 2011

Audit

 

Donald T. Nicolaisen (Chair)

Howard J. Davies

James H. Hance, Jr.

O. Griffith Sexton

  

  Oversees the integrity of the Company’s consolidated financial statements, compliance with legal and regulatory requirements and system of internal controls.        10
         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.

 

        

Compensation,

Management

Development

and Succession

(CMDS)

 

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.         
           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

 

Laura D. Tyson (Chair)

Roy J. Bostock

C. Robert Kidder

James W. Owens

     Identifies and recommends candidates for election to the Board.        5
       Recommends committee structure and membership.         
         Reviews annually the Company’s corporate governance policies.         
           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

Technology*

 

Donald T. Nicolaisen (Chair)

Howard J. Davies

James H. Hance, Jr.

Ryosuke Tamokoshi

(effective July 20, 2011)

 

     Oversees the Company’s operations and technology strategy and significant investments in support of such strategy.        2
      

Oversees risk management and risk assessment guidelines and policies regarding operational risk.

 

      

Risk

 

Howard J. Davies (Chair)

Roy J. Bostock

James H. Hance, Jr.

Maasaki Tanaka

(effective May 18, 2011)

     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.

 

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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 CEO and Chairman, 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 customers 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.

 

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 out of the 13 director nominees are independent as defined by the NYSE listing standards and the Company’s more stringent Corporate Governance Policies and 12 out of the 13 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 Succession 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 Succession 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 (2011 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 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

 

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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.

 

Director Compensation

 

The following table contains information with respect to the annual compensation (including deferred compensation) of our non-employee directors earned during 2011 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

($)

 

Roy J. Bostock

    95,000        250,000        —          —          —          345,000   

Erskine B. Bowles

    95,000        250,000        —          —          —          345,000   

Howard J. Davies

    112,917        250,000        —          —          —          362,917   

James H. Hance, Jr.

    102,917        250,000        —          —          —          352,917   

C. Robert Kidder

    125,000        250,000        —          —          —          375,000   

Donald T. Nicolaisen

    117,917        250,000        —          —          —          367,917   

Hutham S. Olayan

    85,000        250,000        —          —          —          335,000   

James W. Owens

    77,917        333,333        —          —          —          411,250   

O. Griffith Sexton(5)

    87,083        250,000        —          —          —          337,083   

Laura D. Tyson

    95,000        250,000        —          —          —          345,000   

 

(1) Messrs. Tamakoshi and Tanaka and employee directors received no compensation during 2011 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. Cash retainers for service on the Board and a Board committee are paid semi-annually in arrears for the period beginning at the 2011 annual meeting of shareholders and concluding at the 2012 annual meeting of shareholders (the 2011 service period). Amounts in the table represent (i) cash retainers earned for a portion of the 2010 service period (January 1, 2011 to May 18, 2011, the date of the 2011 annual meeting of shareholders) paid or deferred on May 18, 2011, (ii) cash retainers earned for a portion of the 2011 service period (May 19, 2011 to November 18, 2011, the six-month anniversary of the 2011 annual meeting of shareholders) paid or deferred on November 18, 2011, and (iii) cash retainers earned for a portion of the 2011 service period (November 19, 2011 to December 31, 2011) payable on May 15, 2012, the date of the 2012 annual meeting of shareholders (or, if earlier, upon termination from the Board).

 

The annual Board retainer for the 2011 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 2011 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 (provided that no retainers are paid if the director is elected to the Board less than 60 days prior to the annual 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   

 

  * Effective as of May 17, 2011, Chair and member fees for the Audit Committee were each reduced by $5,000 and Chair and member fees of $10,000 were instituted for the Operations and Technology Committee.  

 

Directors can elect to receive all or a portion of their retainers for the 2011 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, Kidder, Nicolaisen, Owens and Dr. Tyson received their retainers for the 2011 service period in cash on a current basis. Messrs. Bowles and Sexton and Ms. Olayan deferred their retainers for the 2011 service period into stock units (Elective Units). Elective Units are not subject to vesting or cancellation.

 

On May 18, 2011, the date of the 2011 annual meeting of shareholders, each of Messrs. Bowles and Sexton and Ms. Olayan received a number of Elective Units in lieu of the remaining 50% of his or her cash retainers earned for the 2010 service period that began on May 18, 2010, the date of the 2010 annual meeting of shareholders, and payable on such date determined by dividing the dollar value of such cash retainers by $24.3936, the volume-weighted average price of the common stock on the grant date.

 

On November 18, 2011, the six-month anniversary of the date of the 2011 annual meeting of shareholders, each of Messrs. Bowles and Sexton and Ms. Olayan received a number of Elective Units in lieu of the first 50% of his or her cash retainers earned for the 2011 service period and payable on such date determined by dividing the dollar value of such cash retainers by $14.2034, 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 2011 service period and, with respect to Mr. Owens, a prorated initial stock unit award, granted during 2011 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, 2011 for the 2011 service period is based on $24.3936, 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. Owens on February 1, 2011 is based on $29.8294, 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 2011 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 dollar value of the initial equity award is $250,000, prorated for service until the annual meeting. The dollar 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 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, the date of the 2011 annual meeting of shareholders, directors received their annual equity awards for the 2011 service period in the form of 10,248.59 stock units (determined by dividing $250,000 by $24.3936, and allocating 50% to Career Units and 50% to Current 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. 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)  

Roy J. Bostock

         35,904           

Erskine B. Bowles

         67,657           

Howard J. Davies

         42,173         7,049   

James H. Hance, Jr.

         18,732           

C. Robert Kidder

         50,926         33,273   

Donald T. Nicolaisen

         45,774           

Hutham S. Olayan

         60,979           

James W. Owens

         13,126           

O. Griffith Sexton

         60,009           

Laura D. Tyson

         25,459         25,847   

 

  (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, 2011, the outstanding stock options had no intrinsic value because the exercise price of each stock option was greater than $15.13, the closing price of the Company’s common stock on December 30, 2011.

 

 

(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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Certain Transactions

 

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 and other extensions of credit by our subsidiaries. The extensions of credit are made on substantially the same terms and conditions, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with other persons and do not involve more than the normal risk of collectability or present other unfavorable features.

 

Each of CIC, MUFG and State Street beneficially owns 5% or more of the outstanding shares of Morgan Stanley common stock as reported under “Principal Shareholders.” During 2011, 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 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 continue 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, the 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 the 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 Company held common and preferred equity interests in FrontPoint (representing in total not more than a 24.9% equity interest). Subsequently, 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 continues 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 are 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.

 

Director Career Stock Unit Holding Requirement

 

As indicated under “Director Compensation,” our independent directors receive an equity award upon initial election to Board and an annual equity award thereafter 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, 2012 by our Chief Executive Officer and the other executive officers named in the “2011 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, as a group. As of February 29, 2012, 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  
       
Name    Shares(1)
         Underlying
Stock  Units(2)
        

Subject to

Stock Options
Exercisable within
60 days

         Total(2)(3)
 

NAMED EXECUTIVE OFFICERS

                                               

James P. Gorman

     310,713             867,921             553,333             1,731,967   

Ruth Porat

     474,683             355,366             115,857             945,906   

Gregory J. Fleming

     123,098             419,682             20,224             563,004   

Colm Kelleher

     53,486             440,062             268,202             761,750   

Paul J. Taubman

     550,706             732,206             299,147             1,582,059   
       

DIRECTORS

                                               

Roy J. Bostock

     43,572             35,998                         79,570   

Erskine B. Bowles

     1,000             67,833                         68,833   

Howard J. Davies

     9,260             42,283             7,049             58,592   

James H. Hance, Jr.

     28,325             18,781                         47,106   

C. Robert Kidder

     70,452             51,059             33,273             154,784   

Klaus Kleinfeld(4)

                                           

Donald T. Nicolaisen

     4,704             41,176                         45,880   

Hutham S. Olayan

     8,000             61,138                         69,138   

James W. Owens

     5,000             13,160                         18,160   

O. Griffith Sexton

     633,934             60,165                         694,099   

Ryosuke Tamakoshi(5)

                                           

Masaaki Tanaka(5)

                                           

Laura D. Tyson

     32,154             25,525             25,847             83,526   
                                                 
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   

 

(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 200,000 shares held in a grantor retained annuity trust for which he 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 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 includes 1,585 shares held by his spouse; Mr. Bostock’s beneficial ownership includes 1,775 shares held by his spouse; and Mr. Bowles’ beneficial ownership includes 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 restricted stock units (RSUs). Directors and executive officers may direct the voting of the shares corresponding to their RSUs. Voting by executive officers is subject to the provisions of the Trust, as described in “Information About the Annual Meeting – How Do I Submit Voting Instructions for Shares Held in Employee Plans?” Excludes performance stock units (PSUs) because executive officers may not direct the voting of their PSUs.

 

(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, 2012 beneficially owned less than 1% of the common stock outstanding.

 

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(4) If elected to the Board at the 2012 annual meeting of shareholders, Mr. Kleinfeld, as a non-employee director, will receive an annual equity award under DECAP in the amount of $250,000. See “Director Compensation” for further details regarding our director compensation arrangements.

 

(5) Messrs. Tamakoshi and Tanaka were elected to the Board pursuant to the Investor Agreement. See “Principal Shareholders” regarding MUFG’s beneficial ownership of Company common stock.

 

Principal Shareholders

 

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    

 

(1) Percentages based upon the number of shares of common stock outstanding as of the record date, March 19, 2012, 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, 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.

 

(4) Based on the Schedule 13G filed on February 13, 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 165,720,173 shares and shared voting power as to 165,299,432 shares; that 134,818,439 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 stock units awarded to employees under several of the Company’s equity-based plans. See “Information About the Annual Meeting.”

 

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, 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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Executive Compensation

 

Compensation Governance

 

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, including reviewing and approving equity grants to executive officers. Information on the CMDS Committee’s processes, procedures and analysis of NEO compensation for 2011 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. 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 speaks 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 goals 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, 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.

 

 

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. The CMDS Committee has selected Hay Group as its compensation consultant. Hay Group has also been retained by the Nominating and Governance Committee to provide consulting services on Board compensation. Other than the consulting services that it provides to the CMDS and Nominating and Governance Committees, Hay Group currently provides no services to the Company or its executive officers. Hay Group 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 Group and also prepares materials for the CMDS Committee’s use in making compensation decisions. Separately, Human Resources 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 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) 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, the CMDS Committee considers our Chief Executive Officer’s assessment of each executive officer’s individual performance, as well as the performance of the Company and our Chief Executive Officer’s compensation recommendations for each executive officer, other than himself.

 

Annual year-end equity and cash-based long-term incentive awards are typically granted by the CMDS Committee after the end of the year. 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, the CMDS Committee has worked 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, the Chief Risk Officer had a series of interactive and detailed working sessions 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 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- 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, 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 of Human Resources 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, 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. 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.

 

In addition to the foregoing, the CMDS Committee regularly reviews with the Chief Executive Officer, 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 taking and have been designed to be consistent with the Federal Reserve Board’s principles for safety and soundness. For 2011, such controls included:

 

 

Redesigning 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 allocate the incentive compensation pool among business areas to take into account the businesses’ returns on certain financial, capital and risk metrics;

 

 

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 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 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 four sections:

 

     Page:

 

I.      Executive Summary

     26   

II.     Compensation Objectives and Strategy

     27   

III.   Compensation Program for 2011

     28   

IV.   2011 Compensation Process and Decisions

     32   

 

I. Executive Summary

 

In recent years, Morgan Stanley has made significant changes to our executive compensation program in response to the lasting impact of the global financial crisis on the industry. For 2011, Morgan Stanley has continued to refine the way we pay our executives, consistent with global regulatory principles, evolving best practices 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,” subject 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.

 

In 2011, Morgan Stanley made significant progress by addressing a number of outstanding strategic and legacy issues – including the conversion of MUFG’s preferred investment into common stock and the comprehensive settlement with MBIA – and achieved market share gains across our institutional businesses, 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.

 

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 reduced 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 of the Company’s Operating Committee (for 2011, our eight most senior executives, including 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.

 

 

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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Furthermore, and consistent with our long-standing objective of aligning executive compensation with shareholder interests, for 2011 we continued to deliver a significant portion of the NEOs’ incentive compensation in equity awards. In addition, all NEOs must retain 75% of the after-tax shares they receive as compensation and are prohibited from hedging any shares of Company common stock. As a result, each of our NEOs is one of our long-term shareholders with the same interests as our other shareholders. The NEOs’ beneficial ownership of Company common stock as of February 29, 2012 is set forth in the table “Stock Ownership of Executive Officers and Directors.”

 

These measures build upon previous years’ efforts to refine our compensation program. For example, 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.

 

II. Compensation Objectives and Strategy

 

Morgan Stanley’s executive compensation program is designed to achieve four key objectives:

 

 

Deliver Pay-for-Performance.    The core of our executive compensation program emphasizes variable incentive compensation that is clearly linked to Company and individual performance. This approach encourages executives to balance increasing financial performance and shareholder value over the year with achievement of the Company’s long-term strategic priorities. It is also designed to reward superior individual performance and promote a shared long-term view among our executive team.

 

 

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 its ability to continue to attract and retain the most highly qualified employees. To serve as one reference point in determining compensation, the CMDS Committee monitors competitive pay levels and structures within the industry. As part of the Company’s effort to be competitive in retaining top talent, our long-term incentive awards include payment, cancellation and clawback provisions to protect the Company’s interests and to encourage executives not to leave the Company for a competitor.

 

 

Align Executive Compensation with Shareholders’ Interests.    The Company delivers a significant portion of long-term incentive compensation in equity awards to align employee interests with those of shareholders. The CMDS Committee believes that linking incentive compensation to Company results over the year and delivering it primarily as deferred long-term incentive awards that are subject to market and cancellation risk over the course of several years helps motivate executives to achieve financial and strategic goals. In addition, members of the Company’s Operating Committee (our most senior executives), including the NEOs, are required to retain at least 75% of the after-tax shares they receive as compensation. Executives are also prohibited from engaging in hedging strategies, selling short or trading derivatives with Company securities. These policies tie a significant portion of our executive officers’ compensation directly to the Company’s stock price.

 

 

Mitigate Excessive Risk-taking.    The CMDS Committee is advised by the Company’s Chief Risk Officer and the CMDS Committee’s independent compensation consultant to help ensure that the structure and design of compensation arrangements do not encourage unnecessary or excessive risk-taking that threatens the Company’s interests or gives rise to risk that could have a material adverse effect on the Company. The CMDS Committee, together with the Chief Risk Officer, evaluated Morgan Stanley’s current compensation programs and considered the Chief Risk Officer’s determination that such programs do not encourage such behavior, due in part to: (i) our balance of fixed compensation and discretionary compensation; (ii) our balance between short-term and long-term incentives; (iii) our mandatory deferrals into both equity-based and cash-based long-term incentive programs; (iv) the procedures followed in making incentive

 

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compensation decisions, including our rigorous up-front risk adjustment process for assessing performance, based on financial, capital and risk metrics; (v) the risk-mitigating features of our awards, such as cancellation, holdback and clawback provisions; and (vi) our equity retention requirements. The CMDS Committee, along with its consultant and the Chief Risk Officer, will continue to review the Company’s compensation programs to ensure they are consistent with evolving best practices, applicable legal and regulatory standards and the Company’s risk policies.

 

III. Compensation Program for 2011

 

A. Compensation Program Highlights.

 

 

Mr. Gorman’s compensation for 2011 was down 25% from 2010.    Despite the progress the Company achieved in executing its strategy in 2011 under his leadership, Mr. Gorman’s compensation for 2011 was 25% below the level of the prior year, reflecting the fact that the Company did not fully meet certain financial priorities for the year. Compensation for the remaining members of the Operating Committee was also down significantly on average from 2010 levels.

 

 

Members of the Company’s Operating Committee, including each NEO, received no cash bonus for 2011. Instead, 100% of year-end compensation was paid with deferred long-term incentive awards, which are subject to market and cancellation risk over a three-year period.    Members of the Operating Committee in 2011 received 100% of their year-end compensation in deferred long-term incentive awards. Deferred compensation for the NEOs was comprised of “at-risk” PSUs, RSUs and deferred cash-based awards under the Morgan Stanley Compensation Incentive Program (MSCIP). A meaningful portion of the 2011 year-end compensation for NEOs was paid in equity, further aligning a significant portion of their compensation with shareholders’ interests by tying it directly to the Company’s stock price. These long-term incentive awards continue to be subject to the Company’s cancellation and clawback provisions, as described below, over a three-year period.

 

 

We redesigned our “at-risk” PSUs program to further moderate risk-taking incentives while continuing to incent performance.    For the third consecutive year, the Company granted 20% of each NEO’s 2011 year-end incentive compensation in “at-risk” PSUs that deliver value only if the Company, after the full three-year performance period, achieves objective performance goals with respect to return on average common shareholders’ equity (ROE) and relative total shareholder return (TSR). In order to better align the PSU program for 2011 with principles of balanced risk-taking, the maximum payout has been reduced from two times the target award to 1.5 times the target award to provide for a less leveraged payout range and the performance target for the average ROE portion of the award was reduced to better reflect the current operating environment. In addition, the TSR portion of the award was modified to provide for a comparison to an industry index rather than a small group of peer companies. By reducing the payout leverage, setting a challenging but achievable goal and removing the volatility of a small peer group, the program is more balanced and less likely to encourage executives to take excessive risk in order to achieve payouts.

 

 

We expanded our “clawback” provisions to apply to all long-term incentive compensation.    In 2008, Morgan Stanley implemented a clawback for a substantial portion of year-end compensation. For 2011, the clawback was expanded to apply to each NEO’s RSUs, in addition to each NEO’s PSUs and deferred cash-based awards. The clawback can be triggered with respect to RSUs, PSUs and deferred cash-based awards if an individual’s act or omission (including with respect to direct supervisory responsibilities) causes a restatement of the Company’s consolidated financial results or constitutes a violation of the Company’s risk policies and standards, whether such action results in a favorable or unfavorable impact to the Company’s consolidated financial results. The PSUs are also subject to clawback following payment if the CMDS Committee determines that the payout was based on materially inaccurate financial statements or other performance metric criteria. The deferred cash-based awards are also subject to clawback if an individual’s act or omission causes, or is reasonably expected to cause, a substantial financial loss on a trading strategy, investment, commitment or other holding originating either in the current year or in any prior year and such trading strategy, investment, commitment or other holding was a factor in his or her award determination. In addition to these clawback provisions, our long-term incentive awards provide for cancellation if the

 

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employee engages in conduct that constitutes “cause” (defined as any act or omission that constitutes a breach of obligations to the Company, which includes, among other things, failure to comply with our compliance, ethics or risk management standards and failure or refusal to perform satisfactorily any duties reasonably required, including supervisory or management duties).

 

 

We 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.    In 2011, the Company’s independent control functions implemented an enhanced, robust review process for identifying and evaluating situations occurring throughout the course of the year that could require clawback or cancellation of previously awarded compensation, as well as adjustments to current year compensation. Clawbacks of previously awarded compensation are reviewed with a committee of senior management quarterly and reported to the CMDS Committee on a regular basis. In addition, the CMDS Committee adopted a global incentive compensation discretion policy that sets forth standards for exercise of managerial discretion in year-end incentive compensation decisions and specifically provides that all managers must consider whether an employee effectively managed and supervised the risk control practices of his or her employee reports during the performance year.

 

B. “At-Risk” Performance-Based Compensation Program.    In 2009, the CMDS Committee, in response to shareholder feedback, approved an “at-risk” PSU program under the Company’s 2007 Equity Incentive Compensation Plan. Like the PSU programs approved by the CMDS Committee for 2009 and 2010, the 2011 PSU program ties a meaningful portion of each NEO’s compensation to the Company’s long-term financial performance and reinforces the NEOs’ accountability for the Company’s future financial and strategic goals by linking the ultimate payout to two core financial metrics of the Company – return on average common shareholders’ equity and relative total shareholder return over a three-year performance period.

 

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:

 

  1. One-half of the target PSU award is based on the Company’s average ROE over the three-year performance period.    The number of “at-risk” PSUs ultimately earned will be determined by multiplying one-half of the target award by a multiplier as follows:

 

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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  2. The other half of the award is based on the Company’s TSR over the three-year period (MS TSR) relative to the TSR of the S&P Financial Sectors Index over the three-year period (Index Group TSR).    The number of “at-risk” PSUs ultimately earned will be determined by comparing the MS TSR to the Index Group TSR and multiplying one-half of the target award by a multiplier as follows:

 

MS TSR vs. Index Group TSR*    Multiplier

Above

   Up to 1.50

Equal

   1.00

Below

   Down to 0.00

 

* 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.

 

C. Compensation Program Components and Design.    The following chart provides a brief summary of the principal elements of the Company’s executive compensation program for 2011.*

 

Compensation Element    Description    Other Features and Comments

1. Base Salary

   An executive’s base salary reflects the executive’s experience and level of responsibility and is intended to be competitive with salaries for comparable positions at competitors.    Base salaries are reviewed periodically and subject to change, for, among other reasons, a change in the executive’s responsibilities or competitive market environment. The CMDS Committee reviewed the NEOs’ base salaries in January 2012 and made no changes from 2011 levels.

2. Incentive Compensation

Mix of Cash and Long-Term Incentives

   For 2011, incentive compensation consisted of equity and MSCIP long-term incentive awards. NEOs received no cash bonus and instead received 100% of year-end incentive compensation in a mix of PSUs, RSUs and MSCIP deferred cash-based awards.    In determining the 2011 deferral for long-term incentive awards, the CMDS Committee considered a number of factors, including the business environment, the Company’s pay-for-performance philosophy and global regulatory principles. As a result, the portion of compensation that was awarded to NEOs on a deferred basis was increased to 100%.

a.     Equity Awards – PSUs

   “At-risk” PSUs awarded to NEOs vest and pay out after a three-year performance period, with the number of PSUs ultimately earned determined by the Company’s performance against predetermined goals. PSUs accumulate dividend equivalents that are paid only to the extent the underlying units convert to shares. PSUs do not provide for voting rights before they convert to shares.   

With the exception of Mr. Fleming’s award, 2011 year-end RSUs are considered vested upon grant; however, these RSUs are subject to cancellation provisions, including upon termination of employment if the NEO leaves the Company to join a competitor.

 

2011 PSUs and MSCIP awards are subject to vesting and, until vested, are generally cancelable upon termination of employment other than by the Company without cause. As a result, the cost of leaving the Company to go to a competitor can be significant to an NEO. Similarly, a competitor who wants to recruit the NEO would incur a significant cost if it were to agree to replace the NEO’s canceled awards.

 

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Compensation Element    Description    Other Features and Comments

b.     Equity Awards –RSUs

   RSUs align employee interests with those of shareholders and convert to shares, and cancellation provisions lift, over the three years following grant. NEOs receive dividend equivalents with respect to the RSUs in the form of additional RSUs, which are subject to the same vesting, cancellation and payment provisions as the RSUs to which dividend equivalents relate. RSUs provide for voting rights.    In addition to competition, other cancellation events for 2011 awards include clawback, conduct constituting cause, disclosure of proprietary information and solicitation of employees or clients.

c.      MSCIP Deferred Cash-Based Awards

   These deferred cash-based awards offer participants the ability to notionally invest their awards in certain reference investments. MSCIP awards are payable, and cancellation provisions lift, over the two years following grant. Participants are unsecured general creditors of the Company with respect to their MSCIP balances.     

3. Voluntary Deferred Compensation Programs

   Historically, the Company offered voluntary programs intended to provide employees with financial planning opportunities generally consistent with those offered by competitors. No Company contributions were made to these programs. Participants are unsecured general creditors of the Company with respect to their balances.    The Company did not offer voluntary deferred compensation programs to the NEOs for 2011. The programs in which the NEOs participate with respect to prior year compensation are described under the “2011 Nonqualified Deferred Compensation Table.”

4. Pension and Retirement

   Our current retirement and savings plans serve an important role in attracting and retaining senior executives. Company-provided retirement benefits in the U.S. include tax-qualified 401(k) plans 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. Long-serving 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 Service 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.

 

Company contributions to savings plans for NEOs are disclosed in the “2011 Summary Compensation Table.” Pension arrangements for NEOs are described under the “2011 Pension Benefits Table.”

5. Health and Insurance Benefits

   All NEOs are eligible to participate in Company-sponsored health and insurance benefit programs available in the relevant jurisdiction.    In the U.S., higher-paid employees pay more to participate in the Company’s medical plan.

 

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Compensation Element    Description    Other Features and Comments

6. Personal Benefits

   The Company provides limited personal benefits to certain of our NEOs. We believe these benefits are necessary for competitive reasons.   

The Company’s Board-approved policy authorizes the Chief Executive Officer 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 “2011 Summary Compensation Table.”

7. 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.

 

* 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.

 

IV. 2011 Compensation Process and Decisions

 

The 2011 incentive compensation of the NEOs was determined at the discretion of the CMDS Committee after consideration of performance against priorities established by the Committee at the beginning of the year, as well as compensation expense considerations, competitor compensation data, relative pay considerations and such other considerations set forth in Section IV.A. The pre-established performance priorities are non-formulaic in nature, do not require specific performance targets or preset goals to be met prior to the awarding of compensation and are not assigned any specific weighting. To the extent the performance priorities were a factor in the CMDS Committee’s determination of compensation of the CEO and other NEOs, they are discussed in Section IV.B below.

 

A. Factors Considered in 2011 Compensation Decisions

 

 

Performance Priorities and Metrics.    At the beginning of 2011, in consultation with the full Board, the CMDS Committee approved specific performance priorities representing qualitative and/or quantitative measures in five key areas: (1) Company financial performance; (2) business development; (3) financial and operating risk management; (4) international businesses and alliance with MUFG; and (5) culture and stakeholder engagement.

 

  1. Company financial performance.    The CMDS Committee approved the following Company-wide financial performance priorities, which reflected the measures primarily focused upon in light of the then-current market conditions:

 

   

Absolute returns, as measured by return on equity;

 

   

Relative returns, as measured by return on equity 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 purposes 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.

 

  2.

Business development.    Priorities were approved for each primary business unit related to business development, client franchise and products. For Institutional Securities, it was the attainment of top

 

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rankings in advisory and equity underwriting, and market-share improvement for both Fixed Income and Equity Sales and Trading. For the Global Wealth Management Group, it was the continued integration of the Morgan Stanley Smith Barney (MSSB) joint venture as measured by the technology platform conversion, pre-tax profit margin, net new assets and net fee-based asset flows. For Asset Management, it was the continued refocusing of the business around core strengths, performance against investment benchmarks, and net new flows.

 

  3. Financial and operating risk management.    Priorities included the further strengthening of risk management and controls, compliance with risk policies and execution on internal initiatives. The Committee also set objectives for investments in IT projects and processes that helped the Company improve productivity, manage risks and control costs.

 

  4. International businesses and MUFG alliance.    For the growth of the Company’s international businesses, a 2011 priority was progress in increasing the international revenue mix. With respect to the Company’s alliance with MUFG, priorities included executing on the Japan securities joint venture and growing non-Japan activities, as measured by market share in advisory and securities underwriting businesses.

 

  5. Culture and stakeholder engagement.    The 2011 objectives for the Company’s culture and stakeholder engagement related to the development of a strong leadership team that embodies the “One Firm” Morgan Stanley culture, as measured by a Board assessment of its leadership and the culture it set for the Company, and the Company’s efforts to strengthen external relationships with key constituencies, as measured by a Board assessment of the Company’s reputation and its relationship and constructive dialogues with its clients, shareholders and regulators.

 

 

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 met the Committee’s objective of balancing adequate returns for shareholders with 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.

 

 

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 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 bonus pool and other executives in similar business areas.

 

 

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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.    As previously disclosed, at the 2011 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 2011 proxy statement (the 2011 “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 2011 “say on pay” vote, Company management solicited feedback from our shareholders and from proxy advisory services on the Company’s 2010 compensation program and conveyed the feedback received to the CMDS Committee. Following the 2011 annual meeting of shareholders, the CMDS Committee considered the results of the 2011 “say on pay” vote, as well as the insights gained from our dialogue with shareholders, in determining 2011 compensation. The changes to the 2011 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) of the Internal Revenue Code.    Section 162(m) of the Internal Revenue Code (Section 162(m)) limits the deductibility of compensation for certain executive officers (other than the Chief Financial Officer) 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 for 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 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.

 

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B. 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 in determining NEO incentive compensation:

 

 

Company Financial Performance.    In December 2011, management reviewed the Company’s year-over-year estimated financial performance for 2011 with the CMDS Committee. Before finalizing compensation decisions, the CMDS Committee reviewed the Company’s final financial results, including the following:

 

   

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 in a pre-tax loss of $1.7 billion.

 

   

As a result 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 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 to the impact of the widening 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 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.

 

   

The Global Wealth Management Group delivered net revenues of $13.4 billion, up 6% from 2010 – driven by higher asset management and net interest revenues. Pre-tax profit margin increased modestly to 10% from 9% a year earlier. Net fee-based asset flows were $42.5 billion, up 30% from 2010, and net new assets increased by $36 billion.

 

   

The Asset 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.

 

   

The Company’s return on average common equity from continuing operations was 3.9%, which was below the ROE performance priority for 2011 and was an important performance measure considered by the CMDS Committee.


* A detailed analysis of the Company’s financial and operational performance for 2011 is contained in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the 2011 Form 10-K. Pre-tax profit margin and the pro forma Tier 1 common ratio under the proposed Basel III capital framework 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, 50 and 53 of the 2011 Form 10-K.

 

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Chief Executive Officer Performance.    In addition to the Company’s financial performance outlined above as well as progress against the other performance priorities identified in Section IV.A, the CMDS Committee’s evaluation of Mr. Gorman’s performance as Chief Executive Officer included his 2011 accomplishments, which consisted of the following:

 

   

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 Stages 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.

 

   

Continued Repositioning and Revitalization of Asset Management 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.

 

   

Executing key strategic actions 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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Other Executive Performance.    In determining the compensation of other NEOs, the CMDS Committee weighed the Company’s overall financial performance and, as applicable, business unit performance, and evaluated each NEO’s individual contributions to the Company’s progress against the other performance priorities identified in Section IV.A, as described below:

 

   

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 in 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 revenue share gains in cash financing and derivatives; Fixed Income Sales and Trading also increased revenue share (excluding DVA and the impact of the MBIA settlement), with contributions from focus areas such as interest rates and currencies.

 

   

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.

 

C. 2011 Compensation Decisions

 

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.


* Source: Thomson Reuters – for the period of January 1, 2011 to December 31, 2011 as of January 3, 2012.

 

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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, 2011 filed with the SEC.

 

Respectfully submitted,

 

Erskine B. Bowles, Chair

C. Robert Kidder

Donald T. Nicolaisen

Hutham S. Olayan

 

2011 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, 2011 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 granted during the year, rather than awards granted after year-end that were awarded for performance in that year. 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 2011 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.

 

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                                                                

 

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* Effective January 13, 2011, Mr. Fleming became President of the Global Wealth Management Group in addition to his being Executive Vice President and President of Asset Management.

 

(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 annual cash bonus for 2011. For 2011, represents deferred cash amounts awarded in January 2012 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). With the exception of Mr. Kelleher’s award, the 2011 MSCIP awards are scheduled to be distributed 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 scheduled to be distributed 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. 2011 MSCIP awards are subject to cancellation and clawback. For further details on MSCIP awards, see the CD&A.

 

(4) For 2011, consists of RSUs granted on January 21, 2011 for performance in 2010 and PSUs granted on January 21, 2011 for performance in 2010 that are subject to satisfaction of predetermined performance goals over a three-year performance period.

 

(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. 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 for Mr. Gorman; $3,700,000 for Ms. Porat; $3,500,000 for Mr. Fleming; $4,097,073 for Mr. Kelleher; and $4,100,000 for Mr. Taubman.

 

     Stock Unit Awards Granted During 2011 for Performance in 2010 ($)

Name

   RSUs    PSUs    Total

James P. Gorman

   3,879,978      2,062,799      5,942,777  

Ruth Porat

   3,699,981      1,967,102      5,667,083  

Gregory J. Fleming

   3,499,988      1,860,772      5,360,760  

Colm Kelleher

   4,097,068      2,178,206      6,275,274  

Paul J. Taubman

   4,099,998      2,179,762      6,279,760  

 

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.

 

Name  

2011

Change in Pension Value

($)(a)

 

2011 Above-Market

Earnings on
Nonqualified
Deferred
Compensation

($)(b)

 

Total

($)

James P. Gorman

    13,272              —         13,272  

Ruth Porat

  244,678     20,607     265,285  

Gregory J. Fleming

           —                —                —    

Colm Kelleher

  257,217              —       257,217  

Paul J. Taubman

  673,936     12,790     686,726  

 

  (a) 

The “2011 Change in Pension Value” equals the aggregate increase from December 31, 2010 to December 31, 2011 in the actuarially determined present value of the accumulated benefit under the Company-sponsored defined benefit pension plans during the measurement period. Employees experienced an increase in the present value of their accumulated benefits from December 31, 2010 to December 31, 2011 primarily due to a decrease in the discount rates described below and, in the case of Mr. Taubman, changes in base salary and the effect of an additional year of credited service in 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. The present values at December 31, 2010 are based on PPA generational annuitant mortality tables and discount rates of 5.59% for the ERP, 5.54% for the Excess Plan component and 5.32% for the SERP component of the SEREP. Post-retirement discounts are based on interest and mortality. For each plan, the assumed benefit commencement date is the earliest age at which the NEO can receive unreduced benefits under that plan or current age, if greater. Mr. Fleming does not have a value shown because he is not eligible for any of the Company-sponsored defined benefit plans.

 

  (b) 

The “Above-Market Earnings on Nonqualified Deferred Compensation” for 2011 equals the aggregate increase, if any, in the value of the NEOs’ accounts under the Company’s nonqualified deferred compensation plans at December 31, 2011 (without giving effect to any distributions made during 2011) from December 31, 2010 that are attributable to above-market earnings. Above-market earnings represent the difference between market interest rates determined pursuant to SEC rules and the earnings credited on deferred compensation.

 

(7) The “All Other Compensation” column for 2011 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) 

For each of Mr. Gorman, Ms. Porat and Mr. Taubman, the Company’s 401(k) matching contribution of $9,800 for 2011 was allocated to the Morgan Stanley Stock Fund. Ms. Porat and Mr. Taubman each received a transition contribution in the Company’s 401(k) Plan for 2011 of $5,127 and $3,316, respectively. The Company contribution to the Morgan Stanley U.K. Group Pension Plan for Mr. Kelleher during 2011 totaled £33,000 ($52,929). The amount of British pounds sterling was converted to U.S. dollars using the 2011 average of daily spot rates of £1 to $1.6039.

 

  (b) 

Prior to his repatriation from New York to London in May 2011, Mr. Kelleher was covered by Morgan Stanley’s overseas assignment policy, which is designed to eliminate any financial detriment or gain

 

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from the overseas assignment. Mr. Kelleher’s amounts include: (a) $522,850 related to his overseas assignment and his entitlements under the policy, including housing expenses, expatriate equalization payments related to taxes, financial advisory and tax planning services, reimbursement for educational costs and cost-of-living adjustments, (b) $165,560 related to housing and other benefits following his repatriation and (c) the costs relating to use of a car service.

 

(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. The amount of British pounds sterling was converted to U.S. dollars using the 2011 average of daily spot rates of £1 to $1.6039. Mr. Kelleher’s base salary was also £490,000 for 2010 and 2009. Differences in base salary reported in the table are due to currency fluctuations.

 

2011 Grants of Plan-Based Awards Table(1)

 

The following table sets forth information with respect to the RSUs, PSUs and stock options granted to the NEOs in January 2011 for 2010 performance. The table does not include equity awards granted to our NEOs in January 2012 for performance in 2011.

 

Name  

Grant Date

(mm/dd/
yyyy)

  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

(#)(4)

 

Exercise or Base

Price of

Option Awards

($/Sh)(5)

 

Grant Date
Fair

Value of
Stock

and
Option

Awards

($)(6)

   

Threshold

(#)

 

Target

(#)

  Maximum
(#)
       

James P. Gorman

  1/21/2011   0   64,904.87   129,809.74             —               —               —                2,062,799
    1/21/2011   —               —               —     129,809             —               —                3,879,978
   

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
    1/21/2011   —               —               —     123,787             —               —                3,699,981
   

1/21/2011

 

  —               —               —               —     182,027   30.01               1,499,993

Gregory J. Fleming

  1/21/2011   0   58,548.21   117,096.42             —               —               —                1,860,772
    1/21/2011   —               —               —     117,096             —               —                3,499,988
   

1/21/2011

 

  —               —               —               —     60,675   30.01               499,992

Colm Kelleher

  1/21/2011   0   68,536.08   137,072.16             —               —               —                2,178,206
    1/21/2011   —               —               —     137,072             —               —                4,097,068
   

1/21/2011

 

  —               —               —               —     182,027   30.01               1,499,993

Paul J. Taubman

  1/21/2011   0   68,585.04   137,170.08             —               —               —                2,179,762
    1/21/2011   —               —               —     137,170             —               —                4,099,998
   

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 Summary Compensation Table” and the “2011 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 Summary Compensation Table” and, except with respect to Mr. Fleming, the “2011 Option Exercises and Stock Vested Table” and the “2011 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 2014 only if the Company satisfies predetermined performance goals over the three-year performance period that began on January 1, 2011 and ends on

 

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December 31, 2013. 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) 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

 

  * 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. ROE, for this purpose, excludes the impact of the fluctuation in the Company’s Debt-Related Credit Spreads on certain of the Company’s borrowings that are accounted for at fair value. The return for each of the first, second and third years during the three-year performance period are weighted 20%, 30% and 50%, respectively.  

 

MS TSR Rank*    Multiplier
1    2.00
5    1.00
9 or 10    0.00

 

  * If the TSR rank is between two of the thresholds noted above, the number of PSUs earned will be determined by straight-line interpolation between the two thresholds. If the composition of the Comparison Group is affected by a corporate event, the grid will be adjusted based on the number of members of the Comparison Group remaining at the end of the performance period.  

 

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 Upon Termination or Change-in-Control.”

 

(3) The RSUs are scheduled to convert to shares according to the following schedule: 50% on February 2, 2013 and 50% on February 2, 2014, and 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 is retirement-eligible under the award terms as of February 8, 2012. 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 Upon Termination or Change-in-Control.” Each NEO is entitled to receive cash dividend equivalents on the 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. The aggregate grant date fair value of the RSUs granted on January 21, 2011 is based on $29.8899, 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, 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 two 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, a NEO would have earned only 12.5% of the target number of units. 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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2011 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, as of December 31, 2011, 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, 2011 are disclosed in the “2011 Nonqualified Deferred Compensation Table.” As of December 31, 2011, the stock options held by the NEOs had no intrinsic value because the exercise price of each stock option was greater than $15.13, the closing price of the Company’s common stock on December 30, 2011.

 

        Option Awards     Stock Awards  
Name       

Number of
Securities
Underlying
Unexercised
Options (#)

Exercisable(1)(2)

   

Number of
Securities
Underlying
Unexercised
Options (#)

Unexercisable
(1)

    Option
Exercise
Price
($)(2)
   

Option
Expiration
Date

(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

    354,986        —          51.7552        2/17/2016        —          —          162,200.34        2,454,091   
          56,772        —          66.7260        12/12/2016                                   
          —          424,731        30.0100        1/21/2018                                   
   
 


 


                 


 


 


 


   

Total 

 

    411,758        424,731                                        162,200.34        2,454,091   

Ruth Porat

    13,466        —          48.5345        1/2/2012        —          —          144,354.74        2,184,087   
          11,699        —          36.2209        1/2/2013                                   
          19,746        —          47.1909        1/2/2014                                   
          23,737        —          66.7260        12/12/2016                                   
          —          182,027        30.0100        1/21/2018                                   
   
 


 


                 


 


 


 


   

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   

Colm Kelleher

    22,775        —          36.2209        12/2/2012        —          —          149,057.08        2,255,234   
          40,201        —          47.1909        12/2/2013                                   
          144,551        —          66.7260        12/12/2016                                   
          —          182,027        30.0100        1/21/2018                                   
   
 


 


                 


 


 


 


   

Total 

 

    207,527        182,027                        —          —          149,057.08        2,255,234   

Paul J. Taubman

    47,686        —          48.5345        1/2/2012        —          —          167,244.55        2,530,410   
          56,941        —          36.2209        1/2/2013                                   
          65,160        —          47.1909        1/2/2014                                   
          116,371        —          66.7260        12/12/2016                                   
          —          182,027        30.0100        1/21/2018                                   
   
 


 


                 


 


 


 


   

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, as follows:

 

Option
Expiration Date

(mm/dd/yyyy)

   Vesting Schedule

1/2/2012

  

100% of the award became exercisable on 1/2/2004. The shares acquired upon exercise were subject to cancellation and transfer restrictions until 1/2/2007.

 

12/2/2012

  

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.

 

1/2/2013

  

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

  

Exercisable in three equal installments on each of 2/2/2012, 2/2/2013 and 2/2/2014.

 

 

(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 under the award terms as of February 8, 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 value of the RSUs is based on $15.13, the closing price of the Company’s common stock on December 30, 2011.

 

(4) The number of PSUs reflects the grant of the target number of units, although the senior executive may ultimately earn up to two times the target number of units, or nothing, based on the Company’s performance over the applicable three-year performance period. The PSUs included in this table were granted to the NEOs for performance in 2009 (with the number 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 the number of 2010 PSUs granted to each NEO as follows: 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) and 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 2 of the “2011 Grants of Plan-Based Awards Table”). The market value of the PSUs is based on $15.13, the closing price of the Company’s common stock on December 30, 2011.

 

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2011 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, these RSUs are also disclosed in the “Stock Awards” column of the “2011 Summary Compensation Table,” the “2011 Grants of Plan-Based Awards Table” and the “2011 Nonqualified Deferred Compensation Table.” The table does not include PSUs granted in January 2011 for 2010 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       
Name   

Number of

Shares Acquired
on Exercise

(#)

    

Value Realized on

Exercise ($)

    

Number of

Shares Acquired

on Vesting

(#)(1)

    

Value Realized on

Vesting ($)(2)

      

James P. Gorman

 

     —           —           129,809       $ 3,879,978        

Ruth Porat

 

     —           —           123,787       $ 3,699,981        

Gregory J. Fleming

 

     —           —           110,079       $ 3,290,250        

Colm Kelleher

 

     —           —           137,072       $ 4,097,068        

Paul J. Taubman

     —           —           137,170       $ 4,099,998        

 

(1) Other than with respect to Mr. Fleming, consists of RSUs that were granted on January 21, 2011 for 2010 performance. For further details on these RSUs, including the terms of the deferral, see note 3 to the “2011 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) 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, the volume-weighted average price of the common stock on the grant date or vesting date, as applicable.

 

2011 Pension Benefits Table

 

The table below discloses the present value of accumulated benefits payable to each of the NEOs and the years of service credited to each NEO under the Company’s defined benefit retirement plans as of December 31, 2011.

 

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 ($)

 

James P. Gorman

 

 

Morgan Stanley Employees Retirement Plan

    4        65        62,511        —     

Ruth Porat

 

Morgan Stanley Employees Retirement Plan

    20        65        343,622        —     
   

Morgan Stanley Supplemental Executive

Retirement and Excess Plan

 

   

22

 

  

   

60

 

  

   

1,124,620

 

  

   

—  

 

  

Gregory J. Fleming(3)    

 

 

                         —     

Colm Kelleher

 

Morgan Stanley U.K. Group Pension Plan(4)

    7        60        132,851        —     
   

Morgan Stanley Supplemental Executive

Retirement and Excess Plan

 

   

22

 

  

   

60

 

  

   

866,211

 

  

   

—  

 

  

Paul J. Taubman

 

Morgan Stanley Employees Retirement Plan

    25        65        371,185        —     
   

Morgan Stanley Supplemental Executive

Retirement and Excess Plan

    26        60        1,310,058        —     

 

(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, 2011 is based on 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. 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) Mr. Kelleher participates 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 ($132,851) as of December 31, 2011. 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 2011 average of daily spot rates of £1 to $1.6039.

 

The following is a description of the material terms with respect to each of the plans referenced in the table above.

 

Employees Retirement Plan

 

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 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 nonrecurring 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 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

 

The SEREP is an unfunded, nonqualified plan. Credited Service is counted starting from the first day of the month after the hire date, except that for certain excess benefits Credited 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 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 in the U.K. Pension 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.

 

2011 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 seven cash nonqualified deferred compensation plans as of December 31, 2011: 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). 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 was not offered to the NEOs for 2011.

 

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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
($)(3)

   

Aggregate

Balance

at Last FYE

($)(4)

 

James P. Gorman

                                         

LCIP

     —          —           (32,088)        —          1,171,476     

MSCIP

     2,328,000          —           18,009        1,172,314          7,331,080     

RSUs(5)

     3,879,978          —           (8,473,617)        72,143          10,440,962     

  


 


  


 


 


Total

 

     6,207,978          —           (8,487,696)        1,244,457          18,943,518     

Ruth Porat

                                         

CAP

     —          —           (15)        —          7,082     

KEPER

     —          —           1,214        2,486          10,049     

LCIP

     —          —           20,208        —          20,208     

MSCIP

     2,220,000          —           (102,280)        1,685,399          4,777,302     

PTIP

     —          —           (86,680)        —          477,316     

RSUs(5)

     3,699,981          —           (3,445,078)        3,332,006          4,332,927     

SEIP

     —          —           (1,828)        —          72,952     

  


 


  


 


 


Total

 

     5,919,981          —           (3,614,459)        5,019,891          9,697,836     

Gregory J. Fleming

                                         

MSCIP

 

     2,100,000          —           1,803        1,050,743          1,051,060     

Colm Kelleher

                                         

CAP

     —          —           27        —          11,024     

LCIP

     —          —           (6,948)        —          1,792,127     

MSCIP

     2,458,244          —           27,788        1,237,902          5,354,262     

RSUs(5)

     4,097,068          —           (4,648,781)        1,322,926          5,668,201     

  


 


  


 


 


Total

 

     6,555,312          —           (4,627,914)        2,560,828          12,825,614     

Paul J. Taubman

                                         

CAP

     —          —           (659)        —          29,005     

KEPER

     —          —           38,838        79,561          321,564     

LCIP

     —          —           149,063        —          3,544,994     

MSCIP

     2,460,000          —           111,437        1,239,948          6,809,467     

PTIP

     —          —           11,400        —          1,256,198     

RSUs(5)

     4,099,998          —           (8,345,655)        80,932          10,242,723     

SECAP

     —          —           45,736        —          5,039,626     

SEIP

     —          —           (564)        —          24,702     

  


 


  


 


 


Total

     6,559,998          —           (7,990,404)        1,400,441          27,268,279     

 

(1) RSU contributions represent RSU awards granted in January 2011 for 2010 performance that are considered vested at grant but are subject to cancellation until the scheduled conversion dates of such awards in 2013 and 2014. MSCIP contributions represent MSCIP awards granted in January 2011 for 2010 performance that are subject to vesting and cancellation until the scheduled payment dates of such awards in 2011 and 2012. Other than with respect to Mr. Taubman, the MSCIP awards reported in this table are also reported as part of the 2010 bonus in the “2011 Summary Compensation Table.” The value of the RSUs in this column (which are also included in the “Stock Awards” column of the “2011 Summary Compensation Table” for 2011, the “2011 Grants of Plan-Based Awards Table” and the “2011 Option Exercises and Stock Vested Table”) is the aggregate grant date fair value of the RSUs based on $29.8899, the volume-weighted average price of the common stock on the grant 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, without 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, 2010 and the value of any contributions made during 2011. Includes any nonqualified deferred compensation earnings that are disclosed in the “Change in Pension Value and Nonqualified Deferred Compensation Earnings” column of the “2011 Summary Compensation Table” for 2011 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, 2011 (or, if applicable, the earlier distribution date), compared to December 31, 2010 (or, if applicable, the later contribution date), as well as (ii) the amount of the vested cash dividend equivalent rights credited in 2011 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, 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 2011 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 with respect to the RSUs, represents the number of vested units held by the NEO on December 31, 2011, multiplied by the average of the high and low prices of the Company’s common stock on December 30, 2011, 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, 2011 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.

 

The following is a description of the material terms with respect to contributions, earnings and distributions applicable to each of the seven 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 are based on notional interests in investment earnings and interest on risk capital investments selected by the Company. Participants generally receive plan distributions after dividends, distributions of capital, liquidation proceeds or other distributions are paid from the underlying investments.

 

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 may 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 make 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 are 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 Upon 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.

 

Select Employees’ Capital Accumulation Program

 

Under SECAP, participants are permitted to defer a portion of their cash bonus or commissions 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 entitle 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 be made in 2012.

 

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RSUs

 

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 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 Upon Termination or Change-in-Control,” as applicable.

 

Potential Payments Upon 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. The section does not include any awards granted to our NEOs in January 2012 for performance in 2011, as such awards were not outstanding, and the NEOs were not entitled to such awards, as of December 31, 2011. For purposes of valuing any equity awards, we have assumed a per share value of $15.13, the closing price of the Company’s common stock on December 30, 2011.

 

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.

 

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 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 Nonqualified Deferred Compensation Table” pursuant to the terms of the arrangements, as described in the accompanying narrative.

 

Even if a NEO is considered vested in a long-term incentive award reported in the “2011 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-term 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.

 

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MSCIP awards also include a provision for clawback by the Company through the applicable scheduled payment date of such awards, which can be triggered if an individual takes, or omits to take, any action (including with respect to supervisory responsibilities) that causes the need for a restatement of financial results, a significant financial loss or other reputational harm to the Company or one of its businesses, or if the Company determines that there has been a substantial loss on a trading position, 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, 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.

 

In addition to the cancellation 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 Employment/Change-in-Control

 

With respect to the unvested outstanding long-term incentive awards held by the NEOs, each NEO would be entitled to the following amounts in the event of a termination of employment, or change-in-control of the Company, on December 31, 2011, 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       —         —  

 

(1) As of December 31, 2011, 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 Nonqualified Deferred Compensation Table”) and therefore, the NEOs are considered vested in such awards.

 

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(2) 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, 2011 (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, 2011 (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, 2011 assume the Company’s performance through the applicable three-year performance period mirror its performance through December 31, 2011. Where applicable, 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.

 

(3) No outstanding stock options held by the NEOs had intrinsic value as of December 31, 2011, as the exercise price of the stock options was in all cases greater than $15.13, the closing price of the Company’s common stock on December 30, 2011.

 

(4) As of December 31, 2011, our NEOs, other than Mr. Fleming, were considered retirement-eligible for purposes of the outstanding MSCIP awards set forth in the “2011 Nonqualified Deferred Compensation Table,” other than with respect to the 2010 year-end MSCIP awards, and therefore the NEOs are considered vested in such awards. Amounts set forth in this column reflect the value of the NEOs’ 2010 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; provided that, amounts set forth in this row with respect to RSU and MSCIP awards that are payable in connection with a qualifying termination will be paid upon such termination. Unvested 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) on 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, 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.

 

(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 the amounts set forth with respect to PSUs reflect Company performance through September 30, 2011. Unvested

 

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options will vest and 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). In exchange for the accelerated vesting and payment of the amounts set forth in this row with respect to 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 or vesting of the awards not been accelerated.

 

(9) Pursuant to the terms of the PSUs, in the event of a change-in-control of the Company on December 31, 2011, the performance period would have ended on December 31, 2011; 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, 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), and therefore, the value reflects a pro-rata reduction in the number of PSUs otherwise payable where applicable. Amounts set forth in this row 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 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, the following assumptions were made: (i) all RSUs, MSCIP and LCIP awards and the applicable pro-rata portion of PSUs became payable, (ii) all cancellation provisions and transfer restrictions lift, (iii) an excise tax rate of 20% and (iv) 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

 

The Audit Committee appointed Deloitte & Touche LLP (Deloitte & Touche) as independent auditor for the year ending December 31, 2012 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, 2012 and will perform other permissible, pre-approved services. The Audit Committee preapproves 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 2011 and 2010.

 

     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  

 

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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; 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

Audit Fees

     $ 3.8          $5.8  

Audit-Related Fees

       0          2.2  

Tax Fees

       3.3          2.3  

 

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 a 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.

 

Audit Committee Report

 

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 2011 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;

 

 

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, 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.

 

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 2011 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, 2012 and are presenting the selection to the shareholders for ratification.

 

Respectfully submitted,

 

Donald T. Nicolaisen, Chair

Howard J. Davies

James H. Hance, Jr.

O. Griffith Sexton

 

Item 3—Company Proposal to Amend the 2007 Equity Incentive Compensation Plan

 

Our 2007 Equity Incentive Compensation Plan (EICP) was approved by shareholders on April 10, 2007. Upon recommendation of the CMDS Committee, on March 22, 2012, the Board adopted an amendment to the EICP to increase the number of shares of common stock available to be granted under the EICP by 50 million 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% of the common shares of the Company outstanding as of January 31, 2012. Under NYSE rules, the amendment of the EICP will not be effective if our shareholders do not approve it.

 

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 has more closely tied compensation to the Company’s long-term financial performance by paying a significant portion of year-end compensation in the form of deferred awards and significantly reducing the portion of year-end compensation paid as a cash bonus. Furthermore, for 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. 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 available shares under the EICP will not be sufficient for grants that would be made over the next year until the 2013 annual meeting of shareholders.

 

As of January 31, 2012, the Company had approximately 14 million shares available for future stock unit and restricted stock awards to employees, which include available shares under the EICP as well as a relatively small number of available shares under the Company’s legacy equity plans. If the 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 2013 annual meeting of shareholders.

 

OUR BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE AMENDMENT OF THE EICPOur 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.

 

 

As 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.

 

 

If the amendment of the EICP is not approved, the Company will lose a critical tool for recruiting, retaining and motivating employees. It would thus be at a severe competitive disadvantage in attracting and retaining talent.

 

 

The terms of our EICP, our annual equity 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 employees typically cannot fully monetize annual equity awards until three years after grant. For example, RSUs granted for 2011 generally vest no sooner than 50% after two years, with the remaining 50% vesting after three years and generally convert to stock on the scheduled vesting dates. Furthermore, annual 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 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 engages 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 Company is paying senior executives in “at-risk” PSUs that only deliver value if the Company meets specific performance targets after three years. That means our senior executives will not

 

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receive a payout on these performance stock units if the Company does not meet the ROE and relative TSR targets in place. If, after payment of the PSUs, the CMDS Committee determines that the performance was based on materially inaccurate financial statements or other performance metric criteria, then the shares paid will be subject to clawback by the Company. The PSUs and RSUs align the interests of executives and shareholders while not encouraging unnecessary or excessive risk-taking.

 

 

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 in cancellation of their equity or other incentive awards granted for fiscal 2005 and subsequent years.

 

 

The EICP prohibits the repricing of stock options and stock appreciation rights (other than an equitable adjustment in connection with a corporate transaction) and the grant of stock option restoration rights (i.e., the right to an automatic grant of a new stock option upon exercise of a stock option without payment of additional consideration in excess of the exercise price of the underlying stock option).

 

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 and the extension of the term of the EICP for which we are seeking shareholder approval, the EICP terms remain unchanged. The capitalized terms not otherwise defined in this summary shall has 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 similar business organizations in which we or one of our subsidiaries has an equity or similar interest (Eligible Individuals). As of December 31, 2011, there were approximately 62,000 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.g., one or more CMDS Committee members or one or more of our officers).

 

Shares Available Under the EICP.    The total number of shares of common stock that may be delivered pursuant to Awards will be 248 million (which takes into account the proposed 50 million share increase), of which approximately 185 million were already granted as of January 31, 2012, 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.

 

 

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; and (v) 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.    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 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.

 

 

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

 

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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.

 

 

Exercise 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.    The CMDS Committee may not “reprice” any stock option or SAR, 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.    The terms of a stock option may not provide for a new stock option to be granted, automatically and without payment of additional consideration in excess of the exercise price of the underlying stock option, to a Participant upon exercise of the stock option.

 

 

Individual Limit on Stock Options and 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 approved by the Company’s shareholders pursuant to Section 162(m).

 

 

Maximum Term on Stock Options and SARs.    No stock option or SAR may have an expiration date that is later than the tenth anniversary of the Award date.

 

 

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.

 

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 approved by the Company’s shareholders. Our shareholders approved the formula currently used by the CMDS Committee at our annual meeting on March 22, 2001. The Company is not seeking to change the current formula. Awards of stock options or SARs determined by the CMDS Committee under the EICP 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 2011 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 will be taxed at ordinary income tax rates on the then fair market value of the shares of common stock distributed at the time of settlement of the stock units and a corresponding deduction will be allowable to the Company at that time (subject to Section 162(m)). The Participant’s tax basis in the shares will equal the amount taxed as ordinary income, and on subsequent disposition the Participant will realize long-term or short-term capital gain or loss.

 

 

Restricted Stock.    A Participant who is awarded restricted stock will not be taxed at the time an Award is granted unless the Participant makes the special election with the Internal Revenue Service pursuant to Section 83(b) of the Internal Revenue Code as discussed below. Upon lapse of the risk of forfeiture or restrictions on transferability applicable to the shares comprising the Award, the Participant will be taxed at ordinary income tax rates on the then fair market value of the shares. The Company is required to withhold tax on the amount of income so recognized, and a deduction corresponding to the amount of income recognized will be allowable to the Company (subject to Section 162(m)). The Participant’s tax basis in the shares will be equal to the ordinary income so recognized. Upon subsequent disposition of the shares, the Participant will realize long-term or short-term capital gain or loss.

 

Pursuant to Section 83(b) of the Internal Revenue Code, the Participant may elect within 30 days of receipt of the Award to be taxed at ordinary income tax rates on the fair market value of the shares comprising such Award at the time of Award (determined without regard to any restrictions which may lapse) less any amount paid for the shares. In that case, the Participant will acquire a tax basis in the shares equal to the ordinary income recognized by the Participant at the time of Award. No tax will be payable upon the lapse or release of the restrictions or at the time the shares first become transferable, and any gain or loss upon subsequent disposition will be a capital gain or loss. In the event of a forfeiture of shares of common stock with respect to which a Participant previously made a Section 83(b) election, the Participant will generally not be entitled to a loss deduction.

 

 

Nonqualified Stock Options.    The grant of a nonqualified stock option will not result in the recognition of taxable income by the Participant or in a deduction to the Company. Upon exercise, a Participant will

 

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recognize ordinary income in an amount equal to the excess of the fair market value of the shares of common stock purchased over the exercise price, and a tax deduction is allowable to the Company equal to the amount of such income (subject to Section 162(m)). Gain or loss upon a subsequent sale of any shares received upon the exercise of a nonqualified stock option generally would be taxed as either long-term or short-term capital gain or loss, depending upon the holding period of the shares sold. Certain additional rules apply if the exercise price for an option is paid in shares previously owned by the Participant.

 

 

ISOs.    Upon the grant or exercise of an ISO within the meaning of Section 422 of the Internal Revenue Code, no income will be realized by the Participant for federal income tax purposes and the Company will not be entitled to any deduction. However, the excess of the fair market value of the shares of common stock as of the date of exercise over the exercise price will constitute an adjustment to taxable income for purposes of the alternative minimum tax. If the shares are not disposed of within the one-year period beginning on the date of the transfer of such shares to the Participant or within the two-year period beginning on the date of grant of the stock option, any profit realized by the Participant upon the disposition of such shares will be taxed as long-term capital gain and no deduction will be allowed to the Company. If the shares are disposed of within the one-year period from the date of transfer of such shares to the Participant or within the two-year period from the date of grant of the stock option, the excess of the fair market value of the shares on the date of exercise or, if less, the fair market value on the date of disposition, over the exercise price will be taxable as ordinary income to the Participant at the time of disposition, and a corresponding deduction will be allowable to the Company. Certain additional rules apply if the exercise price for a stock option is paid in shares previously owned by the Participant.

 

 

SARs.    The grant of SARs will not result in the recognition of taxable income by the Participant or in a deduction to the Company. Upon exercise, a Participant will recognize ordinary income in an amount equal to the then fair market value of the shares of common stock or cash distributed to the Participant. The Company is entitled to a tax deduction equal to the amount of such income (subject to Section 162(m)). Gain or loss upon a subsequent sale of any shares received upon the exercise of SARs generally would be taxed as long-term or short-term capital gain or loss, depending upon the holding period of the shares sold.

 

Equity Compensation Plan Information.    The following table provides information about outstanding awards and shares of common stock available for future awards under all of Morgan Stanley’s equity compensation plans as of December 31, 2011. Morgan Stanley has not made any grants of common stock outside of its equity compensation plans.

 

The following information is intended to update and supplement the table and, we believe, is useful for a better understanding of “Item 3 – Company Proposal to Amend the 2007 Equity Incentive Compensation Plan.” As of January 31, 2012 (i) the number of shares available for grant under the Company’s plans that can be used for the purpose of granting annual employee equity awards was approximately 20.9 million with only 14.2 million available for future stock unit and restricted stock awards; (ii) the number of outstanding full value awards (including restricted stock units and performance stock units at target) was approximately 139 million; (iii) the number of outstanding stock options was approximately 45 million; (iv) the weighted average exercise price of outstanding stock options was $48.1021; and (v) the weighted average remaining life of outstanding stock options was 2.807 years.

 

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     (a)      (b)     (c)  

Plan Category


   Number of securities to be issued
upon exercise of
outstanding options, warrants
and rights(1)


     Weighted-average exercise
price of outstanding options,
warrants and rights