Out With the Old?

In a previous post, I focused on Merrill Lynch as the poster child for today’s financial debacle. In a recent article, the New York Times also takes aim in the context of the financial industry’s struggle with what to do with bonuses in 2009.

At Merrill (and at other investment banks), executives and traders were paid compensation, consisting largely of hefty bonuses, based on “robust” earnings. As it turns out, these earnings were based on the hope that risky investments would turn a profit, making the earnings nothing but a mirage.

The last of the pretend glory years was 2006. That year, Stanley O’Neal, Merrill’s CEO, was paid $46 million in total compensation, $18.5 million of it in cash. Dow Kim, another top executive, was paid $35 million, $14.5 million in cash. In all, Merrill paid between $5 and $6 billion in bonuses — in one year. More than 100 people in Merrill’s bond unit alone made more than $1 million.

Unlike the amorphous earnings, which began to reverse in 2007, the bonuses weren’t reversed. In fact, when Stanley O’Neal left Merrill in 2007, he was given an exit package worth $161 million. Given what had happened to Merrill Lynch under his leadership, O’Neal’s exit package should have consisted of play money.

One of the few firms to put today’s bonuses in proper perspective is Credit Suisse. It will pay a portion of current bonuses to thousands of senior investment bankers using shares of the troubled assets left over from before the financial crisis — perhaps the first step toward withholding bonuses if the profits aren’t real and, then, taking back some of the compensation already paid.

It remains to be seen, of course, whether 2009 will mark a new approach to executive bonuses in particular and executive compensation in general. Or maybe 2010 . . . or . . . .