Morgan Stanley Dean Witter & Co. executives, discussing a decline in fiscal fourth-quarter earnings, acknowledged that a year's worth of bending their own rules on compensation had come back to haunt them.

They also said that discipline will be back next year, at least in terms of new hiring.

"The spectacular start to the year, coupled with the aggressive expansion plans of a number of competitors, contributed to a particularly aggressive compensation environment," Morgan Stanley chief financial officer Robert Scott said in a conference call with analysts on Tuesday. "We had to be pretty competitive in our hiring, so high pay levels took their toll on our revenues, especially in the fourth quarter."

Forced to navigate choppy market conditions, particularly last month, the company said that net income for the quarter that ended Nov. 30 fell 26% from a year earlier, to $1.2 billion, even as net income for the full fiscal year climbed 14% from a year earlier, to $5.45 billion.

"We are pleased with our results for the year, which included a 20% increase in revenues and a 31% return on equity," wrote Philip J. Purcell, Morgan's chairman, and John J. Mack, president of the company, in a joint statement. "At the same time we are disappointed with the decline in our operating margins. Weak results in fixed income and private equity and unusual compensation pressure in institutional securities contributed to the decline."

The New York investment banking giant attributed the fourth-quarter decline to poor results in its fixed-income and private equity areas, which were hurt by the recent market slowdown, as well as higher costs associated with compensating new hires.

Separately, in response to an analyst's question, Mr. Scott said that Morgan Stanley would continue to be a participant in the loan market. Morgan Stanley was among the major financial companies with the worst exposure to one of the year's most notorious bad loans, a $1.7 billion credit to Sunbeam Corp.

"We continue to do the business, but we do it reluctantly," he said. The company's loan portfolio contains high-quality credits and accounts for less than 1% of Morgan's balance sheet, he said.

Morgan Stanley will "stick to its guns" next year and revert back to its no-deals policy in hiring talent, Mr. Scott said. "Going into the first half of 2001, it's going to be more realistic." However, he did not indicate whether there would widespread layoffs at the banking company.

Market forces compelled Morgan Stanley to waive its strict hiring policies - where it refrains from offering contracts or packages available at other Wall Street investment banks to lure talent - to attract professionals in the investment banking and equity research departments, he said.

The staff at its institutional securities unit grew 26% from a year earlier, compared with 14% growth in personnel throughout the company, Mr. Scott said.

A similar story emerged at Goldman Sachs Group, which also reported fourth-quarter results Tuesday and likewise pointed to the market's recent volatility as hindering its performance during the quarter. And like Morgan Stanley, Goldman blamed a more aggressive hiring strategy in part for hampering its bottom-line.

Goldman's net income jumped 27.5% from a year earlier, to $3.25 billion, not including a $180 million after-tax charge in connection with its purchase of the trading operation Spear, Leeds & Kellogg. However, earnings per diluted share fell 2.6%, to $1.50.

David Viniar, Goldman's chief financial officer, said that market uncertainty is forcing the company to examine its balance sheet closely.

The company is digesting several consecutive years of growth, and while it plans to slow the rate of expansion, "we will continue to grow," Mr. Viniar told analysts. However, Goldman will hold back on new hires, rather than lay people off, he said.

Diana P. Yates, an analyst at A.G. Edwards & Sons Inc., said it is unlikely there will be widespread layoffs at either company, though the institutions could pare back in areas where they have indicated slower growth, like high-yield. Some companies have already made cuts in less-profitable lines to combat the market slowdown, she said.

Ms. Yates said her overall outlook for both investment banks was positive. "This was a really tough quarter to earn through, and they didn't have December. They actually fared pretty well."

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