Thain: A First Test of the 2008 Bonus Climate

The 2008 bonus battles have already begun.

The Wall Street Journal reports mer chief executive John Thain would like a 2008 bonus of up to $10 million. Merrill’s board, however, seems to have other ideas.

Last week I wrote about the trouble CEOs were likely to have getting big bonuses in 2008. In 2006, 96.6% of CEOs in the S&P 500 received bonuses — with an average cash payout of $1.9 million according to research firm Equilar. This year could be quite different:

In 2007, bonuses fell mostly on a company-by-company basis, says Steven Hall, managing director of Steven Hall & Partners. “You’re going to see everything down this year,” Hall says, with “big time” declines in financial services and housing industries.

Many boards have no choice but to slash bonuses. At the start of each year, most boards set and disclose specific criteria for yearend bonuses. If those benchmarks—which might include particular revenue or profit targets—aren’t met, no bonus is supposed to be paid.

Even if most benchmarks are met, boards in this environment might use their discretion to limit or cancel a bonus, says Lance Froelich, a compensation consultant and senior director at BDO Seidman. Numbers might still look O.K., he says, “but you can’t ignore the cash position of the company [or] the fact that shareholders have been hurt.”

Thain’s case will be a test of boards’ generosity this year. The argument againsts Thain’s bonuses are many: 1. Shareholders’ pain: Merrill’s stock lost 73% of its value this year, and it was forced to sell itself to Bank of America (bac). 2. Employees’ pain: Thousands of Merrill employees could be laid off as part of the BofA acquisition. 3. Financial performance: Merrill has lost a net $11.67 billion this year. 4. Public perception: Goldman Sachs (gs) executives have already said they’re skipping their bonuses — and, unlike Merrill execs, they managed to keep Goldman independent.

On the other hand, Thain has gotten some good reviews for his first year as Merrill CEO, and he can argue he averted a worse catastrophe.

But here’s a key point about bonuses: Extra compensation isn’t really about looking backward, but looking forward. Boards want to encourage their top performers to stay at a firm.

This is an economic transaction, not a charitable donation. Sure, lots of hard-working employees might deserve bonuses if the only criteria were hard work and skill at their jobs. But, if a company is smart it rewards workers who are hard to replace and economically valuable. In other words, it looks to the future, not the past.

Given the public relations minefield and the effect on employee morale and especially given the fact Merrill will soon stop existing as an independent firm, it’s hard to see how a bonus for Thain makes economic sense.

Read the original story on CEO bonus trends here. We also put together a slideshow of CEOs who do or don’t deserve year-end bonuses.

UPDATE: The Wall Street Journal now says Thain will decline his 2008 bonus, along with Morgan Stanley (MS) chief executive John Mack. That was quick. Apparently the howls of protest did their trick. New York Attorney General Andrew Cuomo said Thain’s bonus request was “nothing less than shocking,” and many of you (in comments below) seem to agree. There is little doubt that this reaction was the goal of whoever leaked Thain’s bonus request to the Journal in the first place.

UPDATE #2: Today’s event made clear that, in this environment, big bonuses for troubled investment banks are public relations poison. There is a lot of debate about Thain (Douglas A. McIntyre of 24/7 Wall St. defends him here), but after today not many financial CEOs will dare mention bonuses to their boards.

But here’s my question: Does this also apply to other sorts of companies and other sectors of the economy?

JPMorgan Chase’s (jpm) Jamie Dimon is a tough case: He’s widely admired for his leadership during the crisis, but at the same time he’s presided over big layoffs and his bank has relied on government help.

In retail, boards face lots of tough decisions. Best Buy’s (bby) share price and earnings expectations have plunged, but its chief executive, Bradbury Anderson, apparently has done a much better job in a tough environment than his rivals. Some, like CCTY.BE, have filed for bankruptcy reorganization.

If every company facing tough times cancels its CEO bonus, almost no top execs would get anything extra this year. Is that fair? What should be the criteria for bonuses at a time like this?

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