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Thain: A First Test of the 2008 Bonus Climate

Posted by: Ben Steverman on December 8, 2008

The 2008 bonus battles have already begun.

The Wall Street Journal reports Merrill Lynch chief executive John Thain would like a 2008 bonus of up to $10 million. Merrill’s board, however, seems to have other ideas.

Last week I wrote about the trouble CEOs were likely to have getting big bonuses in 2008. In 2006, 96.6% of CEOs in the S&P 500 received bonuses — with an average cash payout of $1.9 million according to research firm Equilar. This year could be quite different:

In 2007, bonuses fell mostly on a company-by-company basis, says Steven Hall, managing director of Steven Hall & Partners. “You’re going to see everything down this year,” Hall says, with “big time” declines in financial services and housing industries.

Many boards have no choice but to slash bonuses. At the start of each year, most boards set and disclose specific criteria for yearend bonuses. If those benchmarks—which might include particular revenue or profit targets—aren’t met, no bonus is supposed to be paid.

Even if most benchmarks are met, boards in this environment might use their discretion to limit or cancel a bonus, says Lance Froelich, a compensation consultant and senior director at BDO Seidman. Numbers might still look O.K., he says, “but you can’t ignore the cash position of the company [or] the fact that shareholders have been hurt.”

Thain’s case will be a test of boards’ generosity this year. The argument againsts Thain’s bonuses are many:
1. Shareholders’ pain: Merrill’s stock lost 73% of its value this year, and it was forced to sell itself to Bank of America (BAC).
2. Employees’ pain: Thousands of Merrill employees could be laid off as part of the BofA acquisition.
3. Financial performance: Merrill has lost a net $11.67 billion this year.
4. Public perception: Goldman Sachs (GS) executives have already said they’re skipping their bonuses — and, unlike Merrill execs, they managed to keep Goldman independent.

On the other hand, Thain has gotten some good reviews for his first year as Merrill CEO, and he can argue he averted a worse catastrophe.

But here’s a key point about bonuses: Extra compensation isn’t really about looking backward, but looking forward. Boards want to encourage their top performers to stay at a firm.

This is an economic transaction, not a charitable donation. Sure, lots of hard-working employees might deserve bonuses if the only criteria were hard work and skill at their jobs. But, if a company is smart it rewards workers who are hard to replace and economically valuable. In other words, it looks to the future, not the past.

Given the public relations minefield and the effect on employee morale and especially given the fact Merrill will soon stop existing as an independent firm, it’s hard to see how a bonus for Thain makes economic sense.

Read the original story on CEO bonus trends here. We also put together a slideshow of CEOs who do or don’t deserve year-end bonuses.

UPDATE: The Wall Street Journal now says Thain will decline his 2008 bonus, along with Morgan Stanley (MS) chief executive John Mack. That was quick. Apparently the howls of protest did their trick. New York Attorney General Andrew Cuomo said Thain’s bonus request was “nothing less than shocking,” and many of you (in comments below) seem to agree. There is little doubt that this reaction was the goal of whoever leaked Thain’s bonus request to the Journal in the first place.

UPDATE #2: Today’s event made clear that, in this environment, big bonuses for troubled investment banks are public relations poison. There is a lot of debate about Thain (Douglas A. McIntyre of 24/7 Wall St. defends him here), but after today not many financial CEOs will dare mention bonuses to their boards.

But here’s my question: Does this also apply to other sorts of companies and other sectors of the economy?

JPMorgan Chase’s (JPM) Jamie Dimon is a tough case: He’s widely admired for his leadership during the crisis, but at the same time he’s presided over big layoffs and his bank has relied on government help.

In retail, boards face lots of tough decisions. Best Buy’s (BBY) share price and earnings expectations have plunged, but its chief executive, Bradbury Anderson, apparently has done a much better job in a tough environment than his rivals. Some, like Circuit City, have filed for bankruptcy reorganization.

If every company facing tough times cancels its CEO bonus, almost no top execs would get anything extra this year. Is that fair? What should be the criteria for bonuses at a time like this?

Reader Comments


December 8, 2008 1:15 PM

This is the most disgusting thing I've ever seen. You run a company into the ground, lose billions for your shareholders, cause thousands of jobs to be lost, and you think you deserve a bonus? Seriously? Seriously?

Relax James

December 8, 2008 1:32 PM

Thain inherited Merrill's problems. Most objective observers will say that Thain got the best offer he could for Merrill and kept the company from becoming another Lehman. Many experts have even said that BofA overpaid for Merrill. I'm not saying that he should get a bonus, but lets understand the facts before we start throwing around comments like "disgusting" and "run a company into the ground."


December 8, 2008 1:34 PM

The so-called top performers at the helms of companies like Merrill are vastly over-rated and much easier to replace than they would have you believe.


December 8, 2008 1:40 PM

Thain inherited Merrill's problems. Most objective observers will say that Thain got the best offer he could for Merrill and kept the company from becoming another Lehman. Many experts have even said that BofA overpaid for Merrill. I'm not saying that he should get a bonus, but lets understand the facts before we start throwing around comments like "disgusting" and "run a company into the ground."


December 8, 2008 1:49 PM

What we need is more accountability by the board and the CEOs to the stockholders. Stockholders need more power to void CEOs' contracts for under performance and remove board members.

No golden parachute should payoff in less than 5 years, IMO, to insure CEOs think of the long term. There must be very real consequences for incompetence.


December 8, 2008 2:09 PM

As an interested observer of the financial meltdown over approx. the last 12 months (not an expert in investment banking but do own a medical device business), I would say that John Thain was one of the few of these guys to have the "spheres" to proactively make a monumentally difficult decision seemingly in the blink of an eye. If I recall correctly, in the same weekend that he preserved Merrill's capital in the sale to BofA Lehman went down by not acting.

Not A Moron

December 8, 2008 2:35 PM

I do not pay my employees for what they *might* do, but what they have proven they can do and are doing. Boards that are "future looking" should be dismissed and replaced by boards that understand business. CEOs that expect bonuses when a company is in difficulty ought to be laughed out of the board room.
Real business (as opposed to the corrupt farce that is American public traded business) does not reward in advance of performance. Time for US boards to act responsibly on behalf of the shareholders, not their executive golf buddies. Criminal prosecution, board removal and civil recovery should be employed to ensure compliance. Boards that dole out shareholder money to their buddies should be held accountable for the results of their investment of other people's money.
Time to get rid of the morons at the top of American business and bring in people that are not corrupt and actually know something about running a business besides sitting in a twenty minute meeting before heading to the spa or golf course. And don't hand me the baloney about how hard CEOs work...I have seen them "working" myself at several Fortune 50 companies.
And very little of what a company achieves is due to the limited intelligence of the average CEO, though their stupidity, cronyism and corruption leads to the sort of disasters we routinely witness out of this unethical breed of neanderthals in suits.


December 8, 2008 2:57 PM

He's not so good as to warrant a $10m bonus. What indication from what he has done so far indicates that he is worth the bonus to keep him at Merrill? Like the fat cats at GS he should skimp the bonus, demonstrate his competency and earn his bonus


December 8, 2008 3:10 PM

An "Ugly American" if I ever saw one,
that Mr. Thain.
Best of success to Andrew "Robespierre" Cuomo for exposing and squishing these parasites


December 8, 2008 3:39 PM

Lmfao, Thain what color is the sky in your world?

Chet Gurski

December 8, 2008 3:44 PM

In many cases bonuses are dependent on a performance criterion agreed to at the start of a fiscal year. Indeed Thain should be paid his bonus if he met such a prearranged set of measures. If the investors are dissatisfied with the performance criteria,they should take the board to task. It seems strange that Mr. Thain should be asking for a 2008 bonus. It would seem more appropriate that he should be negotiating a 2009 bonus based on specific measureable goals.

Big Ben

December 8, 2008 4:04 PM

Sure Thain, go ahead and steal from the US taxpayer everyone is doing it. I'm so sick of the media referring these Taxpayer bailouts as "GOVERNMENT" bailouts -- enough of the lies. Do we want to end up like Zimbabwe with $100M banknotes? It's a shame the USA has become like this. Bush & Co. will most likely burn in hell for sending young Americans to die just so his corporate buddies can steal their oil and resell it to us (think xom, bp). Business week needs to do an expose on WAR PROFITEERING and the Bush Administration. Barney Frank and his boyfriend both belong in jail as well, it's not only Republicans.


December 8, 2008 4:24 PM

If the average American worker's job performance was associate with contributing to the points listed below, THEY WOULD BE FIRED - NOT GIVEN A 10 MILLION DOLLAR BONUS:

1. Shareholders’ pain: Merrill’s stock lost 73% of its value this year, and it was forced to sell itself to Bank of America (BAC).

2. Employees’ pain: Thousands of Merrill employees could be laid off as part of the BofA acquisition.

3. Financial performance: Merrill has lost a net $11.67 billion this year.

4. Public perception: Goldman Sachs (GS) executives have already said they’re skipping their bonuses — and, unlike Merrill execs, they managed to keep Goldman independent.

Geo Washington

December 8, 2008 4:47 PM

Obviously, Mr. Thain has an inflated notion of his worth to Merrill. In fact, he is partly responsible for the the demise of his company. Thus, he should be required to pay back a portion of his base salary for his failures, malfeasance, and mismanagement of his company. For someone to suggest they should steal $10 mil from the TARP for incompetence is outrageous.


December 8, 2008 5:03 PM

"Extra compensation isn’t really about looking backward, but looking forward."

Really? When this white collar worker is paid a bonus, it is totally dependent on past performance, not future retention. How is it a CEO is so deserving. If he was so good, he'd have averted the problem entirely.

The C-level management is a bunch of pampered babies who generally produce very little for the company. They could exit and the company would be just fine for years, if not indefinitely.


December 8, 2008 5:35 PM

Absolutely unbelievable that this yahoo would have the guts to make this request in the first place. Evidently he can't see the red on his balance sheet. Hats off to Andrew Cuomo. Obama needs to make him secretary of finance. He's the only one who has had the integrity to go after these companies and get results.


December 8, 2008 6:26 PM

He deserves a bonus...Simply said. Without him MER would have been BSC and LEH


December 9, 2008 10:04 AM

Are you kidding me! Get Real! Did you actually think that this would go not noticed? Why do you exactly belive you deserve this over the rest of your hard working staff?


December 9, 2008 10:42 AM

I have commented all over these boards as to the greed of CEO's, even in these hard time. Mr. Thain is just another exapmle. Those that say he "saved" ML are right. He did. But you DO NOT....repeat DO NOT ask for a bonus when you are laying off people and the comapny itself is on a downward slide. In what world do you save a rape victim from being killed and then ask if she wants to have sex with you for saving her life. Think of this in those terms.


December 9, 2008 1:43 PM

Glad to see the financials shrinking. Now all these former Lehman, Citigroup, AIG, etc. workers will have to get real jobs in, say, Rite Aid. Maybe they can learn how to pour cement and make themselves useful to society in Obama's infrastructure investments. An average Lehman employee made $300,000. Doing what? Lehman is gone and I haven't noticed one bit.


December 9, 2008 2:00 PM

I agree 100% with "not a moron" about the sorry state of American Business in general. We have become a nation where deception is the #1 practice. So, it really does not surprise me that Thain tried to sneak in his request. I applaud the person that leaked this infor. I would like to add that any bale out plan should start with all the executives of a company receiving federal funds to donate their stock options. I find it incredible anyone could justify giving out bonuses because their company did not do as bad as others.

Christopher Holland

December 9, 2008 6:11 PM

Where do I get my $10 million bonus? My record is far better than Thain's - I didn't ruin Merrill, trash the shareholders' wealth, sell the firm to a competitor and make it reliant on public funding. My record is perfect - I don't even work for Merrill, I don't even live in the same country. I deserve a bonus for the things I never did and aren't responsible for much more than John Thain does. Thain is a hopeless amateur when it comes to not doing things and not being responsible, I can beat him any day of the week.


December 10, 2008 9:03 AM

How many people could stay employed for $10 million? That would be a few less layoffs and help put funds back ibto the economy. Paying Thain would not help the economy. The average worker does not get a bonus - s/he hopes to still have a job and maybe, just maybe match inflation with a raise. As a worker laid off due to the economy - I had to take a 30% cut in pay to stay employed - The conditions for bonus' should be laid out in advance, and if not met - the bonus goes down accordingly. Thain - 1] laid off workers, 2]stock price down 73%, 3]public confidence at an all time low, 4]investor returns nonexistant. I'd say he should pay the company for his incompetance. Besides - his tract record shows - probably any of several thousand MBAs could not have done worse. Let him go - get new blood.
Tie bonus to performance - I do not see the boards worried about rank and file workers - just their country club friends. It's time for compensation to match performance. If he creates jobs, stock price goes up, and public confidence goes up - then maybe a bonus, based on preset agreed upon criteria. That is why bonuses are mostly stock based - give him the same number of shares as a bonus, regardles of price, with detracting factors (if a percentage are laid off, the number of shares goes down....).


December 10, 2008 12:37 PM

Just another example where CEO's no longer understand the basic concepts of leadership. Whatever happened to shared sacrifice? Not to mention the rigged game of CEO pay. (i.e. Company does get I get rich, Company does bad I get rich, or I totally screw up and get golden parachute and I get rich). As I tell my wife, my goal in life is to become a CEO. I have no qualifications for it but I am sure I can do as bad a job as these jobs and regardless of what happens to the company and employees I get rich. Welcome to the new American dream (if you can't tell I am being facetious here!!)


December 13, 2008 2:36 PM

All CEOs across America deserve a bonus like all of us do - An Employee Appreciation Lunch and that's all. This year - sory folks, no Christmas party...


January 27, 2009 7:27 PM

Can I get a bail out..single mother of 3 and nurse that busts ass everyday to try to make ends meet..Do these people have a clue what the real world is???

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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