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    2009 Compensation Report: Adapting Employee Compensation to the Current Environment April 2009 Page 1


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    CONTENTS Overview 3 Compensation Objectives and Strategy 4 Key Steps to Further Strengthen Compensation Policies and Programs 5 New Multi-Year Performance-Based Compensation Program 7 How Morgan Stanley Determines Compensation 8 Components of Morgan Stanley Executive Compensation Program 9 Corporate Governance and Compensation Policies 10 Page 2


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    OVERVIEW Morgan Stanley has a clear and well-defined “pay-for-performance” philosophy that pervades the Firm’s culture and motivates its employ- ees. This philosophy is born out in the Firm’s compensation policies and programs. It is reflected in the Company’s 2008 compensation decisions. And, it is further enhanced by a series of changes that the Firm is making to its compensation practices going forward. Our “pay-for-performance” philosophy — and those recent changes — are described in this 2009 Compensation Report. Key Facts about Morgan Stanley Executive Compensation: No bonus for Chairman and CEO John Mack in 2007 or 2008; he has never received a cash bonus as CEO — any bonus he has received has been in equity and thus is aligned with shareholders No bonus for certain of the Firm’s other most senior executives in 2008 2008 year-end compensation for Operating Committee reduced by an average of 75% compared to 2007 The first major U.S. bank to enact a “clawback” that exceeds TARP requirements Enacting a new “multi-year” performance plan Senior executives required to retain at least 75% of equity awards No contracts offering guaranteed incentive pay to senior executive officers, as defined by the Emergency Economic Stabilization Act of 2008 No severance guarantees for senior executive officers Page 3


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    COMPENSATION OBJECTIVES AND STRATEGY Morgan Stanley executive compensation is designed to satisfy six key objectives in order to attract and retain the talented team of people needed to serve the needs of its cus- tomers and clients and build long-term value for its shareholders: Drive Company and Individual Performance: In Align Executive and Shareholder Interests: Morgan order to encourage and reward achievements Stanley delivers a significant portion of long-term toward the Company’s strategic goals and financial incentive awards in equity to motivate employees to performance priorities, Morgan Stanley emphasizes increase shareholder value. Executive officers and variable incentive compensation that is clearly and other members of senior management who are closely linked to both Company and individual members of the Company’s Operating Committee performance. must retain at least 75% of common stock and equity awards made to them while they are on the Com- Balance Short-Term and Long-Term Performance pany’s Operating Committee. These policies tie a Demands: As an executive’s responsibilities increase, significant portion of our executive officers’ net a greater percentage of his or her pay is delivered in worth directly to the Company’s stock price. the form of long-term awards. Morgan Stanley believes that linking incentive compensation to Compete Effectively for Key Talent: Morgan Stanley Company results over the fiscal year, and delivering it competes for talent globally with commercial banks, partially as long-term awards that are linked to multi- brokerage firms, hedge funds and other companies. year performance, appropriately motivates execu- The Compensation Committee of the Board of tives to achieve both short- and long-term financial Directors determines compensation in part by and strategic goals. monitoring competitive pay levels and mix, and ensuring the Company’s compensation programs are Retain Key Talent and Protect the Company’s competitive across the industry. Interests: Long-term incentive awards include cancellation provisions to encourage executives not to leave the Company for a competitor and to protect the Company’s interests. Morgan Stanley also has instituted a clawback provision that could be triggered if an individual engages in certain conduct detrimental to the Company. Avoid Unnecessary or Excessive Risk Taking: The Compensation Committee works with the Company’s Chief Risk Officer and the Committee’s independent consultant to ensure that the structure and design of senior executive officer compensation arrangements do not encourage unnecessary and excessive risk taking that threatens the Company’s value. Page 4


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    KEY STEPS TO FURTHER STRENGTHEN COMPENSATION POLICIES AND PROGRAMS 2008 was a year of extraordinary challenge and change for Morgan Stanley and the entire 2008 vs. 2007 COMPENSATION financial services industry — with tremendous turmoil in the global markets, unprecedented OPERATING COMMITTEE PAY MANAGEMENT COMMITTEE PAY COMPANY-WIDE BONUSES governmental action in the financial sector, and a significantly altered competitive land- scape. As an industry leader, Morgan Stanley recog- nizes its responsibilities to shareholders, clients, employees and the public in this extraordinarily difficult environment. That is why the Firm is taking significant steps to reshape its businesses and making important changes to how it pays its people. The Firm’s executive compensation program has always sought to tie pay to both individual and company performance, to keep its senior management team -50% focused on the long-term, and to closely align executive interests with shareholder interests. However, given the extraordinary challenges facing the financial industry, the Compensation, Management Development and Succes- sion Committee of the Board of Directors and the Company's senior management team have taken a -65% number of steps regarding compensation for fiscal 2008 and for the future that further demonstrate their commitment to the Company’s pay-for-performance -75% philosophy. Key changes to compensation in 2008 include: No Bonus for Top Executives: The three most senior Year-end compensation for the 14 members of the officers of the Company – Chairman and CEO John Company’s Operating Committee was down an Mack and Co-Presidents Walid Chammah and James average of 75% from 2007, while compensation for Gorman – did not receive a bonus for 2008. For Mr. the 35 members of the Management Committee Mack, this was the second consecutive year that he was reduced by an average of 65% from 2007. did not receive a bonus. Bonus Pool Down Across the Company for 2008: In Significantly Reduced 2008 Compensation for Other general, year-end compensation for other employ- Senior Executives: The 2008 bonus compensation of ees was significantly reduced for 2008. Excluding other members of senior management was reduced Financial Advisor compensation (which is primarily to reflect the difficult market conditions, stock price commission-based), the Company’s 2008 bonus pool performance and the Company’s full-year earnings. was reduced by approximately 50% from 2007. (continued) Page 5


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    New “Clawback” Provision: Morgan Stanley was the first major U.S. bank to implement a clawback provision for a portion of year-end compensation. This clawback provision goes beyond TARP require- ments: it applies to a broad group of employees and 75% can be triggered if an individual engages in certain conduct detrimental to the Company or one of its businesses — causing, for example, the need for a restatement of results, a significant financial loss or other reputational harm. The clawback will be in place for up to three years after the compensation is awarded. Senior executives are required to retain New Multi-Year Performance-Based Program: The 75% of their common Compensation Committee approved a new perform- stock and equity ance-based stock unit program for senior Company executives that ties stock unit awards to the Com- awards. pany’s performance over a three-year period, based on financial metrics and performance relative to the Company’s peer group. If performance does not meet minimum standards, executives will receive no compensation under this plan. The program may be modified if necessary to comply with applicable law. (See next page for further details) Other key aspects of Morgan Stanley’s executive compensation program include: Company Provides No Guaranteed Severance: The Company does not provide guaranteed severance to Long-Term Incentive Awards: A significant portion its senior executive officers, and has frozen partici- of year-end compensation is delivered in the form of pation in its Supplemental Executive Retirement Plan equity and other long-term incentive awards – as of 2002 and Excess Benefit Plan as of 2004. ensuring that the interests of senior executives are closely aligned with those of shareholders. For Morgan Stanley's people are the key to its success. And, instance, Mr. Mack has never received a cash bonus even in these challenging times, attracting, motivating during his time as CEO of Morgan Stanley. The only and retaining the most talented people is essential to year-end compensation he has ever received was achieving the Company's long-term financial and strate- paid in Morgan Stanley equity – so his interests are gic goals. The changes the Company has made to its fully-aligned with shareholders. compensation program were designed with these important goals — and shareholders' interests — in Executives Required to Hold 75% of Equity Awards: mind. In the months ahead, the Company will continue Members of the Operating Committee are required to evaluate its compensation practices in light of any new to retain at least 75% after taxes of the equity industry best practices, as well as its performance and awards received while they are on the Committee. the wider economic environment. In the meantime, the This requirement ensures that the interests of senior Company is committed to being as transparent as executives are closely aligned with shareholders. possible about its compensation program. Page 6


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    NEW MULTI-YEAR PERFORMANCE-BASED COMPENSATION PROGRAM In an effort to tie executive compensation even more closely to the Company’s long-term financial performance – and to focus a greater portion of total pay on long-term incentive compensation – the Company is implementing a new performance-based stock unit program. Under this strengthened compensation program, which reinforces the Company’s pay-for-performance philoso- phy, stock units awarded to senior executives must be earned based on the achievement of key performance goals over a three-year period. They will convert to shares of Company common stock after three years only if the Company satisfies predetermined performance goals over that period. 1/3 Under the new long-term per- formance unit program, 1/3 of If the Company does not achieve the specified minimum performance levels, each executive will forfeit his or her senior executives’ target stock entire award. The purpose of this program is to further award will be based on the reinforce senior management’s accountability for the Firm's ROE over a three-year Company’s future financial goals by tying a greater portion period, 1/3 will be based on of their compensation directly to the Company’s core financial metrics. Specifically: the Firm's ROE relative to peers, and 1/3 will be based One-third of the award will be earned based on the on the Firm's shareholder re- Company’s return on average shareholders common turn relative to peers. equity (average ROE). One-third will be earned based on the Company’s average ROE relative to its peers. One-third will be earned based on the Company’s total shareholder return relative to its peers. Shares earned under the award are subject to clawback if it is determined they were based on materially inaccurate financial statements. Furthermore, even if the Company achieves the specified performance levels, the shares of Morgan Stanley common stock underlying the stock units will be subject to transfer restrictions until the Company redeems in full all of its preferred stock issued to the US Treasury. As a result of recent amendments to the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009, the program will continue to be reviewed and may be modified if necessary to comply with applicable law. Page 7


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    HOW MORGAN STANLEY DETERMINES COMPENSATION Morgan Stanley believes that closely linking pay to both individual and company perform- ance motivates executives to achieve the Firm’s short-term and long-term financial and strategic goals. The Compensation Committee determines annual total Productivity, profitability and retention in Global compensation levels after a thorough evaluation of Wealth Management; and Company and individual performance, including: performance against specific performance priorities; a Achievement of key metrics in growth areas in comparison to peer group compensation data; and Asset Management. input and recommendations from the CEO, Independent Directors and the Compensation Committee’s compen- Peer Group Compensation Data sation consultant, among other factors. The Compensation Committee also reviews analyses of pay levels and structures for the Company’s competitor Performance Priorities group, which are provided by the Committee’s compen- Historically, at the beginning of each fiscal year and after sation consultant. The Committee considers historical discussion with the full Board, the Compensation compensation data, consultant estimates of competitors’ Committee has approved specific performance priorities compensation, and performance indicators for the that historically included: members of the Company’s competitor group. Company financial performance, such as: Input and Recommendations from the CEO, the Inde- pendent Directors and the Committee’s Compensation Growth in net revenues; Consultant At the end of each fiscal year, the CEO presents the Relative returns, as measured by return on Compensation Committee with a performance assess- equity from continuing operations; ment and compensation recommendation for a number of senior executives. The Committee reviews the CEO’s Profitability, as measured by profit before taxes recommendations with its compensation consultant to and profit before taxes margin; determine whether they are reasonable in relation to the market for executive talent and considers the recom- Stock price growth, price-to-earnings ratio and mendations in determining year-end compensation. The price-to-book value ratio, as measured relative Committee also reviews executive compensation with to the Company’s core competitors; and the other independent directors before approving compensation decisions. Improved revenue, earnings growth and return on common equity relative to the Company’s core competitors. Client, product, & business development, including: Client development in Institutional Securities, as measured by market share data in global mergers and acquisitions, equity and fixed income underwriting and secondary market trading; Page 8


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    COMPONENTS OF MORGAN STANLEY EXECUTIVE COMPENSATION PROGRAM Morgan Stanley’s executive compensation program is designed to help attract, motivate and retain the talent that is essential to achieving its short-term and long-term finan- cial and strategic goals. As a result, the Firm is committed to moving away from a program that concentrates heav- ily on annual incentive awards and toward a program that is balanced between fixed, short -term, and long-term compensation. 3 Beginning in 2009, we expect the executive compensa- tion program will be comprised of three key elements: Fixed Compensation Base salaries, which are reviewed at least annually, Years reflect executives’ skills, experience, knowledge and level Under the new performance unit of responsibility. These are generally in the range of median base salaries paid by Morgan Stanley’s competi- program, senior executives’ tors to executives with comparable duties and responsi- stock awards will be at risk for bilities. three years and earned based on ROE, shareholder return, and Annual Incentives This at-risk, incentive compensation will be based on relative performance vs. peers. Company and individual performance over a one-year period and tied to both absolute and relative perform- ance metrics. These annual incentives may consist of equity awards and/or cash-based long-term incentive awards. Long-Term Performance-Based Compensation This at-risk, incentive compensation will be based on the Company’s performance over a multi-year period and tied to both absolute and relative performance metrics — as described on page 7 of this report. Under the terms of this program, stock units will convert to shares of Company common stock only if the Company satisfies predetermined performance goals over a three-year period. If the Company does not achieve the specified minimum performance levels, each executive will forfeit his or her entire award. Page 9


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    CORPORATE GOVERNANCE AND COMPENSATION POLICIES The Compensation Committee currently consists of three directors, including the Lead Director, all of whom are independent members of the Board under the NYSE listing standards and the Company’s Director Independence Categorical Standards. The Committee is responsible for reviewing and approving annually all compensation awarded to Morgan Stanley’s executive officers. In addition, the Committee administers the Company’s equity incentive plans, including reviewing 100 % and approving equity grants to executive officers. The Committee actively engages in its duties and follows procedures intended to ensure excellence in compensation governance, including: Retaining an independent compensation consultant to Morgan Stanley’s Compensation provide advice on executive compensation matters, Committee is composed entirely including assisting the Committee in collecting and of independent directors of the evaluating external market data regarding executive Board under the NYSE listing compensation and performance and advising the Committee on developing trends and best practices in standards. executive compensation and equity and incentive plan design. Regularly reviewing compensation programs to ensure that they are consistent with and support the Company’s compensation objectives. Evaluating executive performance with respect to predetermined performance priorities and strategic goals. Granting at-risk compensation to senior executives. Meeting regularly and reporting its findings to the full Board. Page 10


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