Executive Compensation and Merrill Lynch: The Right Hand/Left Hand Problem at the Wall Street Journal
J. Robert Brown | Tuesday, October 30, 2007 at 11:00AM As we discuss a bit the subject of excessive executive compensation, we couldn't help but notice the odd juxtaposition in the Wall Street Journal on the departure of Stan O'Neal from Merrill Lynch. The lead editorial had this to say:
- Politicians and other faux populists like to gripe that CEOs and mere "Wall Street traders" make too much money -- at least until they're asking those traders for campaign contributions. But along with the bonuses in the good times comes the peril of dismissal for major losses. Mr. O'Neal brought Merrill to new and profitable heights as he led the firm into the maze of subprime "collateralized debt obligations" this decade. It was fun while it lasted and the vacation homes are great. But amid the messy aftermath, Mr. O'Neal first cleaned out the Merrill executives who made the mistakes, and now he is taking the fall himself. That's capitalism.
Dismissing those concerned with executive compensation at "faux populists" is a typical but defeating approach for the WSJ and those adhering to this view. A considerable number of commentators (this Blog included) are concerned about executive compensation primarily because it indicates a sleeping board, one that does not oversee sufficiently the CEO and adequately ensure profit maximizing behavior. The dismissive attitude of the WSJ, without addressing the concern over sleeping boards, indicates that, in fact, the newspaper seeks to promote board discretion without accountability.
In any event, in the same edition of the paper was the article discussing the possible compensation for O'Neil that accompanies "the peril of dismissal for major losses." It seems that having been deemed responsible for a $7.9 billion write down, one that the main editorial says was "a big surprise all right" and that circumstances suggests "was late in coming." O'Neil will apparently get a departure package that could be worth as much as $160 million. To the extent that O'Neil genuinely brought Merrill to profitable heights, he presumably was compensated for the success already. This amounts to the payment of massive compensation for apparently having made a serious business mistake. In other words, the perils suffered by CEOs in this situation is to be paid substantial compensation if they are successful and substantial compensation if they are unsuccessful. This is hardly an environment designed to encourage top officials to always profit maximize.
The WSJ ended the editorial this way: "One difference between Wall Street and Washington is that in the latter no one ever admits a mistake, much less suffers for it." We haven't heard O'Neil admit a mistake (conforming to legal disclosure requirements does not count). We also wonder whether the payment of $160 million sufficiently eliminated most of his suffering.
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