Merrill had axed 3,400 jobs as a response to its poor profit picture late last year.
Unlike Bankers Trust, which chose to pay out big bonuses despite its loss last year, Merrill Lynch is changing its bonus plan to tie employee compensation to overall performance and shareholder value.
Merrill executives distributed a memo to all employees late last week explaining the new plan, through which employees are given new stock options that can be exercised only if the brokerage giant reaches preset profitability goals.
The new plan was first reported by Bloomberg News.
A Merrill Lynch spokesman declined to comment on the plan. Merrill traditionally refuses to comment on employee compensation matters. One employee who is affected by the new bonus plan said many employees were upset by the move.
It is believed the biggest U.S. brokerage took the unusual step of changing its bonus plan because its total profit measured only $1.3 billion in 1998, down 34 percent from the $1.9 billion it made in 1997.
Merrill had axed 3,400 jobs as a response to its poor profit picture late last year.
Under the plan, employees who usually receive cash bonuses – including investment bankers, traders and analysts – instead receive a one-time grant of stock options allowing them to buy Merrill stock at $72.34 per share once certain performance goals are met.
Merrill stock closed yesterday at $73.50.
Employees can exercise some portion of the options at the end of this year only if Merrill exceeds by $20 million a 15-percent return on shareholder equity.
For every $20 million Merrill makes in excess of that goal, employees will be able to exercise 1 percent of their options. That means Merrill would have to beat by $2 billion the 15 percent return on shareholder equity for all of the options to vest this year.
That is what is known at Merrill as “economic profit” and requires that the new bonus options become of value to employees only if shareholders are also enjoying a surge in value. In 1998, Merrill did not post an “economic” profit, but in 1997, the “profit” was more than $800 million. If Merrill repeats 1997’s performance in 1999, employees will be allowed to exercise 40 percent of their new bonus options.
After nine years, Merrill employees will be allowed to exercise any remaining options.
The CEO David Kamansky is holding his employees to a tougher standard than he faces himself.
“After reviewing the proxy, it appears that Komansky’s compensation is based on broad performance measures, but not tied to ROE or net income targets like the new employee plan,” said Darren Engh, senior associate at Compensation Resource Group. “Komansky’s bonus is based on more subjective measures.”
Komansky also holds unexercised options that were offered at a low strike price and could be worth an estimated $100 million if exercised now.
Merrill is not the only Wall Street firm that is grappling with the contentious issue of how to incent employees in a year where the firm had a lousy performance.
Last month, Salomon Smith Barney executives told employees that they would have to wait until late January before they received their year-end bonuses.