All of Gorman's bonus will be deferred for a period of two to three years, including a $5.1 million restricted stock award detailed in a filing with the U.S. Securities and Exchange Commission on Friday evening.

The lower bonuses with tighter restrictions reflect weak performance at Morgan Stanley in 2011, as capital markets reacted to the European sovereign debt crisis and a downgrade of the U.S. bond rating. Clients pulled back sharply on trading and investment banking activity, hurting profits across Wall Street.

Morgan Stanley lost money in two of four quarters and had difficulty meeting profitability targets that were earlier outlined by senior management. Its return on common equity - a key measurement of profitability - was a meager 3.9 percent from continuing operations for the full year.

Morgan Stanley, like other rivals including Goldman Sachs Group Inc (GS.N), responded to rough market conditions by cutting staff and salaries.

The bank capped cash bonuses at $125,000 for employees, an unusually low amount for a workforce accustomed to multi-million dollar paydays. In mid-December it announced plans to lay off 1,600 employees, which comes in addition to hundreds of underperforming financial advisers dismissed from its wealth management business earlier in the year.

Overall, Morgan Stanley paid out $16.4 billion worth of compensation and benefits in 2011, which translated into $264,996 per employee. The figures were higher than the previous year because of severance costs from recent layoffs, higher pay for financial advisers and an unusually large amount of deferred compensation from previous years that came due in 2011.

Gorman and other members of his operating committee have been given a 21 percent cut in bonuses collectively, all of which will be deferred, said the source familiar with top-level pay.

In Form 4 filings with the Securities and Exchange Commission on Friday, Morgan Stanley detailed $24.5 million worth of restricted stock to nine top executives on Thursday as part of their 2011 bonus payments.

Greg Fleming, the head of Morgan Stanley's wealth management business, and Paul Taubman, an investment banker who is co-head of institutional securities, each received restricted stock worth $3.4 million on Thursday, using the bank's closing price of $18.28. Colm Kelleher, the bank's other co-head of institutional securities, who has a background in trading, received a $2.6 million award.

Chief Financial Officer Ruth Porat received $3.2 million worth of restricted stock and her deputy, Paul Wirth, received $1.1 million in RSUs. Chief Operating Officer Jim Rosenthal received $2.9 million worth, while Chief Risk Officer Keishi Hotsuki received $1.8 million in RSUs.

Newly promoted Chief Legal Officer Eric Grossman was the only executive to receive an award under $1 million, at $975,000.

The restricted stock units, as well as other performance-based stock awards, will vest over a three-year period, according to the source, who spoke on the condition of anonymity.

In addition to those awards, Gorman will also receive a cash bonus over a period of two years. The $10.5 million total bonus comes in addition to the $800,000 salary he received for 2011 and is down from $14 million in 2010.

(Reporting By Lauren Tara LaCapra; editing by Andre Grenon)

• A Permanent Economic Emergency