* The AFL-CIO Total is calculated as originally proposed by the U.S. Securities and Exchange Commission (SEC) in its initial 2006 rule making on executive compensation disclosure.  On Dec. 22, 2006, the SEC amended the disclosure rules for stock options and other equity awards. Under this change, companies are required only to include the value of equity awards that vest during the fiscal year instead of the full value that are granted to executives. The SEC Total follows the approach used by the Financial Accounting Standards Board in determining the amount of options to be expensed in a company’s financial statements. In order to show the full value of equity awards granted to executives, the AFL-CIO Total includes the Grant Date Fair Value of Stock and Options Awards as found in the Grants of Plan-Based Awards table of the company’s proxy statement. The AFL-CIO believes this total calculation better represents the full value of compensation awarded to executives as decided by the board of directors during the fiscal year in question. The AFL-CIO Total follows the method the SEC has historically used in disclosing options granted to executives.

John J. Mack, chairman and chief executive officer of Morgan Stanley, received $41.7 million in compensation in 2007, a year in which the prestigious Wall Street firm reported the first loss in its 72-year history because of a $9.4 billion charge on subprime related investments.[1] Under his employment contract, which expires in 2010, Mack also is entitled to tax gross-up benefits, as well as continued medical and dental benefits.[2]

Mack did not receive a bonus in 2007 because of the company’s losses related to the mortgage crisis, but he did receive stock awards valued at $40.1 million and $399,153 of other compensation on top of his $800,000 salary, according to the company’s 2008 proxy.

Among the chief executives of Wall Street firms that have taken a major hit from the subprime mortgages, he is the only one who has kept his job. Despite an effort by the CtW Investment Group, the California State Teachers’ Retirement System and other large investors to toss him from the board, Mack was re-elected as chairman at Morgan Stanley’s April 8 annual meeting.[3] The write-downs led to a 44 percent decline in Morgan Stanley’s share price that erased $35 billion in shareholder value for the year ending March 7, 2008.

When he was brought back to lead Morgan Stanley in 2005 after a management feud threatened to tear apart the firm, Mack promised to double earnings in five years.[4] The firm’s $3.59 billion loss for the fourth quarter of the fiscal year ending Nov. 30, 2007, forced Mack to renege on his promise and sent Morgan Stanley hat in hand to a Chinese investment firm for $5 billion infusion of capital.

In a press release announcing the loss on Dec. 19, 2007, Mack called the write-down “deeply disappointing, and agreed to forgo the year-end bonus. But instead of accepting ultimate responsibility for Morgan Stanley’s performance, he blamed the “isolated losses” on a “small trading team.”[5] In a conference call with investors about the earnings, Mack said the firm’s losses “resulted from an error of judgment that occurred on one desk, in our fixed-income area, and a failure to manage that risk appropriately.”[6] 

That trade represented 23 percent of the firm’s common equity in fiscal 2006 and prompted Moody’s Investors Services to raise questions about the “effectiveness of Morgan Stanley’s trading risk management.”[7]

In fact, much of the blame for the firm’s losses rests with Mack. Shortly after returning to lead Morgan Stanley in 2005, he pushed the firm to take more risk and bet more of its own money on big trades and investments, a strategy that prompted the company to dive deeply into subprime mortgages, leveraged loans and derivatives and backfired badly.[8] Mack also compromised the independence of the firm’s risk management by having the chief risk officer report to Zoe Cruz, co-president, who also oversaw fixed income trading, instead of reporting directly to him.

After the firm’s 2007 trading losses came to light, Mack fired Cruz and said the firm’s risk managers would now report to the chief financial officer.[9] “Mack’s strategy is to be aggressive and use the balance sheet to support businesses that he’s expanding,” said Dick Bove, financial strategist at Punk, Ziegel & Co. “It’s not working and management turnover is excessive.”[10]