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Merrill Lynch’s Compensation Plan Is Lesson for Pay Czar

Time:2018-03-04 09:35Turbochargers information Click:


Can Washington really control outsize pay on Wall Street, which many critics say fueled this crisis? And can Mr. Feinberg and federal regulators ensure that their plans will work?

Most of the financial industry, after all, is out of Mr. Feinberg’s reach. And after the bailouts, many banks are moving toward paying employees more in the form of stock, rather than in cash, and spreading out workers’ payouts, much as Merrill did a few years ago.

At Merrill Lynch — whose 2008 bonuses have come under sharp scrutiny in Congress — some employees stand to profit from the 2006 incentive plan, which was turbo-charged by the company’s own money. The payments, due in January, are outside Mr. Feinberg’s purview, because they were guaranteed before pay restrictions were imposed on bailed-out banks. But the office of the New York attorney general, Andrew M. Cuomo, who is investigating the 2008 payouts, has questioned at least one Merrill executive about the 2006 plan.

Robert Stickler, a spokesman for Bank of America, said the coming Merrill payouts would be awarded as scheduled. Since the payments were tied to Merrill’s performance over four years, including a dismal 2007, some of the money has already been clawed back. Such punitive features, Mr. Stickler said, resemble some of the potential solutions the bank is considering. “In some aspects, that’s where we have been going in compensation in working with Feinberg’s office, so it is a sort of template,” Mr. Stickler said.

The Merrill plan, copies of which were reviewed by The New York Times, was authorized by the firm’s board and recommended by Towers Perrin, a compensation consulting firm.

Under the 2006 plan, top Merrill executives contributed a part of their bonuses from the prior year to an incentive plan that was then converted into stock. If Merrill did well, the firm doled out more shares to the employees at the end of each year. The plan was repeated over three years, and employees could not sell their stock until 2010.


Kenneth R. Feinberg is considering how to curb compensation at bailed-out banks. Credit Joshua Roberts/Bloomberg News

Compensation experts who reviewed the plan commended much of it. They noted that the 34 Merrill executives included lost all of the money they put in for 2007, because Merrill performed poorly that year. But the main failure, they said, was that Merrill used leverage to juice its employees’ returns in good years.


As of this week, some managers have made a 9 percent return on their investments in the plan, although top executives have lost 17 percent. But both groups have fared better than an ordinary shareholder would have with similar investments in Merrill stock. Those investors would have lost 45 percent.

“What we have here is something that was by and large good, and now the spotlight is on plans like this,” said Lucian A. Bebchuk, a professor at Harvard Law School who has studied compensation. “But there are elements that could be improved on.”

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The Merrill bonus plan was controversial from the start. It was created by Ahmass L. Fakahany, Merrill’s former co-president and chief operating officer, as part of a broader pay overhaul that also placed greater limits on workers’ ability to sell company stock and increased the amount of their pay that would come in stock.

For the top six executives, Merrill contributed $1.5 million for every $2 million each executive invested in the plan, leveraging the possible returns. For the next 28 workers in the plan, Merrill paid in an amount two and a half times their investments. That meant that the workers started out ahead, no matter how the shares performed.

“That’s an awful lot of leverage,” said Brian Foley, a compensation consultant in White Plains. “Would you risk a buck in order to make six bucks? Yeah, you would. Maybe that’s why people there were focused on the upside and not the risks.”

A year into the Merrill plan, a $2 million investment by a senior executive was worth $11.5 million. Merrill’s subsequent losses in 2007, though, meant that the money invested that year would be forfeited, essentially clawing back part of old bonuses.

Compensation experts who reviewed the Merrill plan wondered if it should have applied to more employees. Rank-and-file workers also take risks that can jeopardize a bank.

Merrill might also have used a longer-term measure than a single year’s results to decide how many shares to grant executives, Professor Bebchuk said.

And the plan also contained a provision that would automatically award top workers more stock in the event that Merrill was sold — which it was.

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