The O'Neal Effect

by Matt Perkins

The retirement of former Merrill Lynch Chairman and CEO Stanley O’Neal this week certainly added fuel to the fiery debate over CEO compensation, and the public’s perception of the disconnection between pay and performance.

 

O’Neal’s outsized exit package of $160 million ($24.7 million in retirement benefits, $5.4 in deferred compensation, and $131.4 million in stock and option holdings) will only exacerbate the pressure that boards are under to rein in executive pay packages, especially after Merrill reported $7.9 billion in bond losses in its third quarter this year.  Most likely, they’ll have to revisit severance arrangements.

 

Christopher Dodd (D-CT), chairman of the Senate Banking Committee, told Bloomberg this week that O'Neal's package may revive say-on-pay efforts in Congress, as O'Neal shouldn't be rewarded for poor performance, and that the Committee may proceed with legislation aimed at placing a cap on excessive pay for executives.

 

"There's a lot of controversy, mostly on the other side," Dodd told Bloomberg, referring to Republicans. "We'll try to get unanimity where we can.  But there's a possibility we'll move on it."

 

David Schmidt, a consultant with James F. Reda & Associates LLC, says it's probable that boards are going to be more careful to understand how much it's going to cost them if an executive has to leave for whatever reason.  “Even though on paper it might look perfectly legitimate, at the end of the day if someone leaves and then you go and add it all up, you look back and go ‘Oh my God.'"

 

Schmidt says while the numbers from O’Neal’s package look staggering, there is some underlying logic behind them when boiled down. “It’s a lot of money, but it represents payout for maybe two or three years.  The reason it’s a big number is it includes several years of payouts.”

 

But would the numbers be different had O’Neal been terminated, rather than having chosen to retire?  Schmidt says O’Neal’s retirement means that he still gets restricted stock, which he wouldn't have been granted if he’d been officially fired by the company.  “They have a policy that relates to the legibility of the restricted stock that is a little counter intuitive in the context of traditional retirement notions.”

 

The latest in a series of CEOs to walk away from disasters with a hefty pay check, O’Neal, who received a 2006 pay of about $48 million, is the second highest paid CEO on Wall Street, behind only Lloyd C. Blankfein, CEO of Goldman Sachs Group Inc.

 

“The Merrill Lynch case is just another chapter in an ongoing tale of high-profile, supposedly high-potential CEOs who crash and burn,” says Scott Spreier, a senior consultant in Hay Group’s McClellan Center for Research and Innovation.  “Given the current rash of such stories, one wonders if organizations shouldn't be spending more effort on how they select their top leadership and their readiness to effectively replace them should they fail.” 

 

Earlier this year, when Robert Nardelli was ousted as CEO of Home Depot, he left with an exit package of $210 million – a deal the board could not escape after it signed his contract in 2000 - motivating investors to push for changes in the board’s composition.