Nov. 20 (Bloomberg) -- After wandering for almost four years in a comparative pay desert, John Thain has found a compensation oasis at Merrill Lynch & Co.

The about-to-be chief executive officer of Merrill has signed a contract with a base salary and option and free-share grants that I estimate are worth about $64 million.

And that doesn't include a $15 million bonus when he shows up for work on Dec. 1. Future bonuses will be determined by Merrill's board annually.

To make up for Thain forfeiting any unexercised option shares or unvested free shares at his current employer, NYSE Euronext, Merrill will give him new options and new free-shares having comparable economic value, using, for the options, the Black-Scholes model. That's fair. I figure the tab for this make-up will be a bit more than $3 million.

For his lost 2007 bonus, Merrill will pay Thain $15 million. I find that strange, since his bonus at NYSE Euronext for 2006 was a mere $3.25 million.

NYSE seems to be having a fine year. Its earnings per share in the first three quarters rose 58 percent from a year earlier. But shareholders have also had to endure a total return of negative 12 percent for the year through Nov. 16. That compares with a 4.6 percent return on the Standard & Poor's 500 Index.

Perhaps Thain is deserving of a substantially higher bonus for those high EPS numbers in 2007. But $15 million seems a stretch to me, suggesting that some of that money might really represent a ``welcome aboard'' gift on the part of Merrill.

Thain Pay Philosophy

Thain's contract, which has no termination date, shows that his compensation philosophy couldn't be more different than that of Stan O'Neal, his Merrill predecessor.

O'Neal's pay from 2004 through 2006 had nary a risky option share, just wads of free shares. The nice thing about them, as O'Neal discovered when he was ousted and got to keep his unvested free shares, is that even if your lousy performance depresses the company's stock price, it's almost never so bad as to push it to zero. So you still walk out with millions.

In April 2006, Thain turned his back on cushiness, slashing his NYSE base salary to $750,000 from $4.12 million. In 2003, his last year at Goldman Sachs Group Inc., where he was chief operating officer, he received total pay of $20.2 million.

He's showing his appetite for risk in his Merrill pay- package by accepting options covering 1.8 million shares and 500,000 free shares.

Future Performance

A normal option grant carries a term of 10 years, has a strike price equal to the market price at grant and becomes exercisable through the passage of time. It's the same in Thain's case for a third of his 1.8 million option shares. But the other two-thirds have stiffer conditions attached because they vest on the basis of future performance, not merely because a certain amount of time has passed.

The second tranche of his option grant covering 600,000 shares can't be exercised until Merrill's share close at $20 or more for 15 consecutive trading days than on the day the grant was made. This feature is known as a ``barrier option.''

Another 600,000 shares require that Merrill's stock price rise $40 before exercise can occur. And none of those 1.2 million shares can be exercised for at least two years past their grant, even if Merrill's price soars beforehand.

Assuming future volatility was equal to Merrill's current implied volatility of 45 percent, the average likely gain at the end of the 10-year terms for the $20 and $40 price barriers would be only 0.7 percent and 2.4 percent less, respectively, than would have been the case had there been no barriers incorporated into Thain's options. So the barriers seem to be more symbolic than substantive. But even a little more pay risk is a nice thing to behold.

New Thinking

Those barriers and the centerpiece of Thain's pay package being stock options as opposed to free shares represent a refreshing change in pay philosophy from the O'Neal era.

Thain won't receive any supplemental pension arrangement of the kind that had been used at Merrill in earlier years, and he won't get any severance if he's fired for other than cause. He will, though, become immediately vested in his previously unvested stock-option grants and free-share awards.

John Thain is betting a large part of his compensation on making a difference at Merrill. Still, risky or not, his pay package is enormous and would be considered excessive for any industry anywhere, except on that tiny slice of Manhattan called Wall Street.

(Graef Crystal is a columnist for Bloomberg News. The opinions expressed are his own.

To contact the writer of this column: Graef Crystal in Las Vegas at at graefc@bloomberg.net.

Last Updated: November 20, 2007 00:07 EST