Merrill Execs Get Stock, Not Cash, For '07

Feb 1, 2008 - Merrill Lynch & Co. is offering stock-option grants to some high ranking officials instead of bonuses for 2007. The Management in its SEC filing says these retention options "promote the continuity of the management team as they continue to navigate through challenging market conditions in 2008."

Greg Fleming, president and COO, received 1.2 million retention stock options. Robert McCann, vice-chairman and president of global wealth management was awarded 971,346 special options and Rosemary Berkery, vice-chairman and general counsel, received 593,600.

One third of the retention options will become exercisable on or after January 28, 2010, with the remaining exercisable two years from now only if specified stock price targets are achieved. Half, if the stock closes at an average of $80 a share over any 15-day trading period, and other half if the stock closes at an average of $100 a share over any 15-day trading period.

John Thain, who stepped in as CEO in December in the wake of Mr. O'Neal's departure, received a nice initial pay package when he agreed to take over as CEO in November. It's valued at anywhere from about $50 million to as much as $120 million if Merrill's stock goes up $40 from where it was when he was hired. On NYSE yesterday, Merrill shares fell $1.38 to $56.09.

John Thain in Jan-08 has promised to overhaul the bank’s bonus system following record Wall Street pay-outs, despite huge losses.

Merrill’s executive chairman said one of his first initiatives would be to rework the bank’s pay system. “We are going to move toward a compensation system based more on how the whole company did, then on how the individual business did, then how the individual did.”

But Mr. Thain also said “It’s basically an impossible situation. Most of our businesses had very good or record years. The huge losses were created by a small number of people.”

I question the reasoning behind these payments.

• Does Merrill really have to keep them?
• How is Merrill going to balance with individual performers VS performance of company as a whole? Ultimately it comes down to the simple fact that financial system rewards people for taking extravagant risks.
• It looks like Fleming won't be receiving a bonus, that’s an encouraging sign but what about huge package former CEO Stan O'Neal left with? Merrill Lynch, paid $100 million in the last two years as a result of the massive profits the bank made during the subprime housing bubble. When the bubble burst, Merrill Lynch suffered massive losses which eliminated the earlier gains. O'Neal, however, won't be giving any money back.
• Merrill Lynch chief executive officer John Thain wants to change compensation system. The problem is he trying to close the stable door after the horse has bolted?
• Further more, stock options give executives an incentive to strive for great results. But they do not adequately punish bad results because, if the share price falls by a little, the value of the option is zero; but if the share price falls a lot the value is still zero.
• Some companies will no doubt argue that they have to offer extravagant pay packages to attract top management talent. That's fine, but it underscores Shareholders say and a need for government intervention.