Morgan Stanley, the second-biggest US securities firm, plans to defer at least 65 per cent of year-end bonuses for its top 30 executives to blunt criticism over outsize pay, a person familiar with the matter said.

One-fifth of the deferred amount will be tied to Morgan Stanley's performance, said the person, who spoke on condition of anonymity because discussions on the plan are private. The remainder will be a combination of Morgan Stanley shares and cash and won't be fully paid for three years, the person said.

Banks including Goldman Sachs Group have changed the way they pay employees in response to demands by shareholders and regulators that compensation be more closely aligned with company performance. President Barack Obama this month said he's frustrated that Wall Street firms that benefited from last year's taxpayer bailouts continue to enrich top executives, investment bankers and traders.

The bonus deferrals at the New York-based bank were reported yesterday on the Wall Street Journal's website.

US regulators, seeking to rein in the risk-taking blamed for triggering the worst recession in 60 years, imposed limits on bonuses. Special US master Kenneth Feinberg on October 22 slashed 2009 cash compensation for top executives at seven companies, including Citigroup and Bank of America, that received extraordinary taxpayer aid, forcing the firm to focus on stock-based compensation.

Goldman Sachs, the most profitable firm in Wall Street history, on December 10 said the top 30 executives at the New York-based firm will get year-end bonuses in stock they can't sell for five years.

Over the first nine months of 2009, Morgan Stanley set aside US$10.9 billion ($15.2 billion) for compensation and benefits, down 9.2 per cent from the year before. Revenue fell 47 per cent from a year earlier to US$17 billion.

Chief executive officer John Mack, who plans to step down this week, told employees in a December 18 memo that he would forgo a 2009 bonus partly because of the "extraordinary financial support governments provided to our industry" and the "economic challenges facing so many countries".

Morgan Stanley's shares, which tumbled 70 per cent last year, are up 83 per cent this year.

About half the 2009 performance-based bonuses will be in special shares that only pay out if Morgan Stanley's stock price gains more than its peers, the person said.

The other half will only be paid if Morgan Stanley's return on equity - a gauge of profitability and earnings growth - exceeds a specified target, the person said.

That target will be disclosed in a regulatory filing detailing compensation matters in advance of next year's annual shareholder meeting.

The Morgan Stanley stock and restricted cash awards will be paid out in equal instalments at the end of the second and third years, the person said.

The restricted cash awards are also subject to a "clawback" provision that require recipients to reimburse the firm if the pay is based on profits that later turn out to have been overstated, the person said.

- BLOOMBERG