Stanley O'Neal may not be getting a severance in the technical sense, but that doesn't mean he's walking away from Merrill Lynch a poor man.
The chief executive "retired" Tuesday after a tumultuous few months of steep derivatives losses that resulted in the biggest quarterly loss in its 93-years as a company.
O'Neal, who had been chief executive since December 2002 and had 21 years total at the firm, did not have an employment contract. But because he was allowed to retire, instead of being fired as most expected he would be, he is eligible to receive the $160 million he has accumulated in an employee pension plan that is available to many other Merrill employees. That includes $30 million in retirement benefits and $129 million in stock and option holdings.
That's $160 million for losing $2.24 billion.
Of course O'Neal isn't alone in the annals of really big walking-away pay packages. And certainly he has made some positive contributions to Merrill. Perhaps his crowning achievement of the last year was Merrill's 49% stake in the hot investment management firm BlackRock, which in turn agreed to take on Merrill Lynch Investment Management.
He will be remembered, however unfortunately for him, for presiding over a big push to increase the firm's proprietary risk taking -- all the better to juice profits (which were at record levels earlier this year) -- and losing big.
Academics from Northwestern's Kellogg School of Management, researched the subject of severance and concluded in September that it can be an incentive for risk taking. The value of employee stock options "increases when companies' stocks are more likely to move significantly higher," wrote Thomas Lys, Tjomme Rusticus and Ewa Sletten. "The expected value of severance pay, on the other hand, increases when companies' stocks are more likely to fall and CEOs are more likely to lose their positions."
The pattern is not unique to this decade. In the late years of the go-go 1990s, several financial chief executives raised eyebrows for taking away huge severance packages after driving their companies into the ground on risky strategies.
Stephen Hilbert of Conseco, for example, took home an estimated $72 million even though the value of the company's stock during his tenure sank from $57 to $5 a share and the company ultimately ended up bankrupt. Conseco's misstep, on Hilbert's watch, was buying home finance company Greenpoint Financial just before the last great subprime lending blowup.
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Then there was Frank Newman, the ex-chief executive of Bankers Trust, whose aggressive push into technology banking and lending, coupled with an unfortunately large position in Russian government bonds in the summer of 1998, brought the investment bank to the brink before being rescued in an acquisition by Deutsche Bank. He walked away with $55 million.
Philip Purcell left Morgan Stanley after a shareholder revolt against him in 2005, and took with him $43.9 million plus $250,000 a year for life.
Richard Grasso, who headed up the New York Stock Exchange, took $140 million in deferred compensation and the disclosure of that payment sparked a furor that led to his departure. The pay also provoked an investigation and lawsuits, which are still being worked out. Grasso has vowed to fight.
Douglas Ivester of Coca-Cola took $120 million when he stepped down in 2000 in his mid-50s. The departure was deemed a "retirement," but Ivester had presided over a period of stagnant growth, declining earnings and bad publicity.
The big winner in the severance derby: Robert Nardelli, who walked away from Home Depot with $210 million. He fixed up the home products retailer using techniques he learned as an executive at General Electric, but by 2006, he was starting to seriously irritate shareholders. The final straw was when he told the board to skip the annual shareholder meeting and prevented shareholders from speaking for more than a few minutes. He was ousted in January 2007.
