Is John Mack worth $40 million?

When a CEO takes home tens of millions, even after a great year, some critics wonder if it's worth it.

By Rob Kelley, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Morgan Stanley's John Mack has just taken home $40 million in stock and options - the largest bonus ever given to a Wall Street CEO - and it's expected that the record will be broken in coming days.

And you can't say that Morgan Stanley, one of the nation's biggest brokerage houses, hasn't had an exceptional year - its stock has risen 40 percent so far and analysts surveyed by Thomson expect the firm to report annual earnings of $7.1 billion, up 45 percent from last year's $4.9 billion. (Full story)

Morgan Stanley CEO John Mack
Morgan Stanley CEO John Mack

Bonus pay makes up a huge majority of most Wall Street workers' compensation. Mack, for instance, made a base salary of $337,000 this year.

Mack returned to Morgan Stanley in June 2005 after the company had been underperforming for years, succeeding former CEO Philip Purcell, the man who had ousted him in 2001.

Mack was given stock worth $26 million when he joined - and then earned $13 million in compensation and benefits for his first five months of work, of which $11.5 million was in restricted stock.

"If you include last year's compensation, we're talking about them offering $80 million in less than two years," said Paul Hodgson, compensation expert at governance watchdog The Corporate Library.

"The decision to reward him so much again would seem to be somewhat unnecessary, even considering that the company achieved its best performance since 2003."

Morgan Stanley was not immediately available for comment.

More Wall Street CEOs are expected to take home record pay in 2006. It is expected that the compensation of Goldman Sachs Group's CEO, Lloyd Blankfein, will exceed $50 million, according to the Wall Street Journal. Last year, he took home $38 million in overall compensation.

Earlier this week it was announced that Goldman Sachs employees will receive a total of $16 billion in compensation in 2006 - an average of over $600,000 per employee. (Full story)

"The logic seems to be, 'Having done better than last year, compensation must go up,'" said Hodgson. "But it was a very good year for IPO and buyout activity, so pay increases should only go to those CEOs whose performance exceeded the industry's average performance."

Morgan's net income is expected to climb 45 percent this year, compared to 49 percent expected at Bear Stearns, and 42 percent at Goldman. Analysts expect Lehman Brothers to show a 19 percent gain, and Merrill Lynch income is anticipated to be up 3 percent over last year. So, growth-wise, Mack is clearly near the top.

Investment banks have enjoyed a banner year in 2006 with a flurry of acquisitions, private equity buyouts and initial public offerings. Banks are paid to advise companies in the deal negotiations.

The shareholders' say

The compensation issue all goes back to the shareholders - the people that management are supposed to answer to.

If $40 million in stock and options is what it takes to keep an exceptional CEO at peak performance at the head of a company whose stock is worth $84 billion, then perhaps the shareholders are actually getting a value?

"It would have to be clear that the increase in performance was due to Mack being CEO rather than Purcell," said Hodgson.

"But part of the reason you don't hear a lot of outcry from shareholders at investment banks is that there aren't as many outside shareholders as at other companies. Many of the shareholders are people within the firm," he added. "So the volume of objection is considerably lower than it might be in a widely held public company."

He also said that objections to earnings tended to be lower after the company had recorded exceptional earnings that year.

Bear Stearns (Charts), Merrill Lynch (Charts) and Lehman Brothers (Charts) are also expected to report on compensation levels in coming days.


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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.