Merrill’s Failed Pay Plan Digging Deeper

Calling all nerds compensation. There is an article in The New York Times on Thursday on a bonus plan for Merrill Lynch executive, who sought to link pay to performance. The plan, of course, except that the investment bank to take risks that forced mortgage giant to be sold to Bank of America.

Here, the author of this article, Louise Story, outlines details of the plan for Merrill, which was very complex, in a manner typical of Wall Street:

The skin in the game:

Merrill executives were forced to put a portion of the premium each year in a vehicle that held company stock. For senior executives, the contribution was $ 2 million per year. The next level of executives put in $ 666,666 a year, and the third level set in $ 333,333 a year.

These contributions were undoubtedly a lot of money. However, there were always a large percentage of former executives-year bonds, which were sometimes more than $ 20 million.

Furthermore, in a twist, in 2007, up from Merrill-most executives receive no bonuses at all. That meant they were not obliged to put money back into the plan in its third year. The other two levels of executives had to contribute to three years.

The Match:

Merrill contributed $ 1.5 million earlier this year for the six top executives. For the second and third level executives, Merrill contributed two and a half times the amount that individuals put in

After the first year of the plan, the Board became concerned about Merrill's party was paying the company and took it off the next two years from the senior executives. The party continued for the next two levels of executives.

The performance measure:

Merrill empató el plan de retorno de la empresa en la equidad. In years when the return on capital was above a threshold of 13.85 percent, the company applies a multiplier to the number of shares held by executives. Thus, in 2006, for example, return on equity was so high that Merrill shares multiplied by 250 executives percent by the end of the year.

The Clawback:

In the years of return on equity was 12.15 percent less than the executives of Merrill lost his contribution since the beginning of this year, and Merrill put the game in. This happened in 2007, and executives lost. Since the contributions of its bonds executives left last year, this amounts to a clawback of some of the money paid in premiums in 2006. The clawback, however, applied only to contributions from executives in a single year, not the previous years.

The mandatory option

When executives at Merrill put money in the plan are immediately converted into shares. In a shift in the stock options, Merrill establish pricing for this conversion on the basis of prices in January 2006. For top executives, the price was $ 72.10 and the other executives, the price was $ 68.90. Such price fixing would have been a boon for executives if the company's shares went up. But since the fall, the executives were paying punitive rates of the population.

The Lock-Up:

The plan took three years: 2006, 2007 and 2008. However, the stocks held within it was closed until January 2010, when all will become marketable at a time.

The change of control:

Last year was a horrible year for Merrill, in terms of its return on equity and other outcomes. Such action would have meant to the executives who have lost their contribution for that year. But there is a provision stating that the sale of Merrill resulted in a max-out on return on equity. Instead of Merrill executives lose their share of that year, the shares multiplied by 250 percent.

This type of bonus can sulk some investors, who saw its population last year. But the sale of Merrill to Bank of America is widely considered to have been a good deal for Merrill shareholders, so it could have been of interest for executives to have a setback of the offer.

The Returns:

The New York Times estimated the internal rate of return that these executives have been based on current price of Bank of America shares. Executives in the second two levels of workers have earned a positive return of 9 per cent of their investment, despite losses in the stock price of Merrill. Their profits are the result of receiving free shares through Merrill strong parties and rewards for good return on capital.

Most senior executives did not, and workers in the second and third levels, because it stopped Merrill equals the contributions of top executives from 2006. The members of Merrill's high command support to recover some of the money put into the plan but have declined by 16 per cent of their investment.

The Bottom Line:

Talk to people who were in the plan, and they will tell you that it worked because executives at Merrill lost money in the "clawback" in 2007 and also by the share price sunk. However, executives at all did better than regular investors who put money in the same three points, but have not leveraged the company to help. Of course, the work of company executives, and the plan was intended to compensate in part for this work.

Why not plan to save Merrill? Some experts suggested that compensation should have been applied to many more people. Others said the return of one year on equity can not be the right metric. And others said that the risk management and capital standards also contributed to the problems at Merrill.

Tags: Economics

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