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How Executive Compensation Tried and Failed at Merrill Lynch


Merrill Lynch tried pay for performance and failed in 2006, but future plans may extend to rank-and-file employees.

Two years before business leaders and the Obama administration’s “Pay Czar,” Kenneth R. Feinberg, began to debate the merits of pay for performance as a model for executive compensation, Merrill Lynch tried it and failed, according to a report in today’s New York Times.

Those on the side of regulation have argued that the financial collapse was, in part, the product of a Wall Street compensation scheme that rewarded executive bonuses based on short term gains and risks without penalty. Those in favor of greater regulation argue that executive’s compensation should be tied to “their company’s stock price. Withhold big paydays for years. Claw back bonuses if things go wrong. And force risk-loving traders to gamble with their own money, not just their company’s,” the Times said.

But Merrill Lynch approved a compensation plan based on those principles for its 34 top executives in 2006. (NYT: Merrill Lynch’s Failed Pay Plan.) It was authorized by the firm’s board and recommended by Towers Perrin, a compensation-consulting firm, said the Times. Nonetheless, two years later, the investment bank collapsed under the weight of risky investments made by executives.

So, how or why did it fail to keep Merrill out of peril? Some compensation experts cited by the Times argue that the plan didn’t go far enough in people or time.

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.

All lessons we can expect to educate Feinberg and the corporate captains devising future models of executive compensation.

(Image by srqpix via Flickr, CC3.0)

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