Digging Deeper Into Merrill’s Failed Pay Plan

LOUISE STORY

Here, the author of that article, Louise Story, outlines more
details of the Merrill plan, which was highly complex, in typical Wall
Street fashion:

The Skin in the Game:

Merrill's executives
were required to put a portion of each year's bonus into a vehicle that
held company stock. For top executives, the contribution was $2 million
a year. The next tier of executives put in $666,666 a year, and the
third tier put in $333,333 a year.

These contributions were
undoubtedly a lot of money. However, they were not always a large
percentage of the executives' previous-year bonuses, which at times
were more than $20 million.

Also, in a twist, in 2007, Merrill's
top-most executives did not receive bonuses at all. That meant they
were not required to put new money in the plan in its third year. The
second two tiers of executives did have to contribute all three years.

The Match:

Merrill
contributed $1.5 million at the start of the year for the top six
executives. For the second and third tier of executives, Merrill
contributed two and a half times the amount that individuals put in.

After
the first year of the plan, Merrill's board became concerned about the
match the firm was providing and removed it in the next two years from
the top executives. The match remained for the next two levels of
executives.

The Measure of Performance:

Merrill tied the
plan to the firm's return on equity. In years when the return on equity
was above a 13.85 percent threshold, the firm applied a multiplier to
the number of shares

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