In the wake of Bank of America CEO Ken Lewis’ sudden retirement last week — effective at the end of the year — there is a lot of speculation about who the next CEO will be, particularly since he or she will likely inherit a firm that still owes the government $45 billion from the Troubled Asset Relief Program (TARP).
One of the candidates being mentioned as a possible successor to Lewis is Sallie Krawcheck, the head of Bank of America’s wealth-management unit. That position, which Krawcheck moved into two months ago, now comes complete with the honor of overseeing Merrill Lynch, the troubled investment broker that BofA bought in the midst of the economic crisis.
In an appearance yesterday on CNBC, Krawcheck was asked whether she intends to change compensation practices at Merrill Lynch, an idea which she derided as “stupid,” because she wants to “honor the culture” at Merrill:
The first line of being a successful manager is don’t do stupid things. And so, trying to go and change the compensation — I’ve heard we’re going to try and smash U.S. Trust and Merrill together — we’re not doing any of that stuff. What we want to do is bring these great capabilities that we have to clients, [and] honor the culture…The industry always tinkers with compensation on the edge. For the industry, it’s sort of an annual ritual.
But maybe Krawcheck should take a closer look at what went on at Merrill, before its implosion, because the culture regarding pay doesn’t seem like something worth holding onto. As New York Attorney General Andrew Cuomo’s office pointed out, “large payouts became a cultural expectation” at Merrill Lynch, even when the company tanked:
[A]s Merrill Lynch’s performance plummeted, Merrill severed the tie between paying based on performance and set its bonus pool based on what it expected its competitors would do. Accordingly, Merrill paid out close to $16 billion in 2007 while losing more than $7 billion and paid close to $15 billion in 2008 while facing near collapse. Moreover, Merrill’s losses in 2007 and 2008 more than erased Merrill’s earnings between 2003 and 2006. Clearly, the compensation structures in the boom years did not account for long-term risk, and huge paydays continued while the firm faced extinction.
700 Merrill employees received bonuses of $1 million or more in 2008. The Wall Street Journal also pointed out that “the second largest Wall Street bonus of 2008…was the $39.4 million paid out to Thomas Montag,” Merrill’s head of global sales and trading. Montag’s unit “piled up the brunt of the company’s $15.31 billion net loss in the fourth quarter of 2008,” which “forced taxpayers to shell out an additional $20 billion to Bank of America to make sure its $50 billion acquisition of Merrill closed in January 2009.”
Of course, BofA is one of the companies whose pay packages are subject to review by the Obama administration’s “compensation czar,” Kenneth Feinberg, who may have a different feeling regarding whether Merrill’s compensation culture is worth preserving.