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Corporate Governance

: The Race to the Bottom

The Director Compensation Project: Merrill Lynch

By Justin Loyola

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This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2007’s Fortune 100 and using information disclosed in each company's 2008 proxy statements. In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence. Meeting stock exchange requirements is mandatory for most listed companies.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. Directors are not independent if they received over $100,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii). This is a looser restriction than the equivalent NASDAQ Rule, 4200(a)(15), which includes all compensation. Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Merrill Lynch’s (MER-NYSE) 2008 proxy statement:


	Fees Earned or Paid in Cash

Director	Annual Retainer		Committee Chair Retainer		Stock Awards		Increase in Pension Value		All Other Compensation		Total

Carol T. Christ	$	37,500	$	n/a	$	154,221	$	n/a	$	50	$	191,771
Armando M. Codina		75,000		10,000		185,068		n/a		99		270,167
Virgis W. Colbert		75,000		n/a		185,068		n/a		1,497		261,565
Alberto Cribiore		75,000		10,417		185,068		n/a		706		271,191
John D. Finnegan		75,000		21,667		185,068		n/a		1,120		282,855
Judith Mayhew Jonas		75,000		n/a		185,068		n/a		15,762		275,830
Aulana L. Peters		75,000		n/a		185,068		—		9,996		270,064
Joseph W. Prueher		75,000		15,000		185,068		n/a		3,742		278,810
Ann N. Reese		75,000		16,667		185,068		n/a		789		277,524
Charles O. Rossotti		75,000		10,000		185,068		n/a		4,353		274,421
Jill K. Conway		25,000		13,333		—		n/a		—		38,333
David K. Newbigging		25,000		8,333		—		n/a		16,341		49,674

Director Compensation. Last year the board of directors met 12 times, each director attended at least 75% of the meetings. The non-employee directors averaged $228,517 in total compensation. As can be seen in the table, much of the directors’ compensation came in the form of stock awards, which are considered director’s fees for purposes of complying with exchange rules. Providing such a large portion of director’s fees in stock awards allows Merrill Lynch to pay its directors handsomely while saving cash and complying with the exchange rules at the same time.

Director Tenure . The average director tenure is about four years, the longest is fourteen. Most of the directors serve on other boards such as General Motors, Home Depot, Sara Lee, 3M, Northrop Grumman, The Chubb Corporation, Sears, Xerox, and others.

CEO Compensation. The CEO, Mr. Thain, was paid $17,307,610 last year, a relatively small portion of which came in the form of direct salary ($57,692). The remaining compensation came from a $15 million signing bonus, $902,966 in stock awards, and $1,342,503 in option awards.

Full post as published by The Race to the Bottom on May 06, 2008 (boomark / email).