Thain Pain: Why Some CEOs SHOULD Get Bonuses

All of America now can rest easy: Merrill Lynch chief John Thain won’t get his $10 million bonus after all, having succumbed to browbeating calls for fiscal restraint.

Dennis Kneale
CNBC Media &
Technology Editor

Upside: Maybe we can avoid another round of outrage from Congressmen and other whiners who are shocked—shocked!—that anyone on Wall Street could get paid so handsomely, much less actually deserve it.

Downside: Thain gets screwed out of what rightfully was his, for he did deserve a bonus, for myriad reasons. Same goes, arguably, for Morgan Stanley chief John Mack and the seven senior execs at Goldman Sachs, all of whom will forgo any year-end payout. Worse, this whole kerfuffle may embolden the self-righteous, sanctimonious mob that now decries wealth creation and the profit motive. Where were all these populist prudes when the stock market was rising 63% from 2003 through October 2007? Answer: They were fat and happy and counting their money.

It’s one thing when a greedy fatcat utterly fails his shareholders, guts his company and walks away with an undeserved windfall. Two lamentable examples: the $42 million parachute for Charles Prince, who flopped at integrating the smokestacks of Citigroup and let it plunge head-first into the subprime debacle; and the $160 million sendoff for Stanley O’Neal, accumulated over an entire career at Merrill Lynch before he looked the other way while his traders loaded up on wild-eyed risk.

John Thain, by contrast, was brought in only a year ago to fix the Merrill mess, and he worked 24/7 to do it. Troubled rivals Lehman Brothers and Bear Stearns dilly-dallied—rather than swallow their pride and sell themselves to healthier partners—and they went belly-up, pretty much. Thain, by contrast, handed Merrill over to Bank of America . Since mid-September, just before that deal popped, the stock price of Citigroup is down 43% and Goldman is down 46%—but Merrill shares are up 5%.

That’s a gain of more than $1 billion in market cap for that floundering firm, so a $10 million bonus barely is a rounding error. Ten million bucks, in fact, is equivalent to how much revenue Merrill collects in just 20 minutes, based on a 40-hour work-week.

'Funny Business' with Jane Wells:

• Maybe John Thain Should Get that Bonus

Yet now we’re gonna take pleasure in stiffing John Thain? Sounds a little punitive to me.

This CEO backlash, moreover, could spread far beyond Wall Street to infect the entire U.S. economy. Yet, last year, median pay rose only 1.3% and bonuses fell by 5% for the CEOs of more than 230 multibillion-dollar companies, even as their stock prices rose an average of 7.5%, says the research firm Equilar. At financial giants the median pay package fell 20% in 2007, and Wall Street now braces for haircuts of 40% to 70%.

Okay, so some CEO pay is way out of whack, and too often mediocre performance is rewarded richly. In the late 1970s the bigwigs earned an average of 30 times the rank-and-file worker’s paycheck, and by this decade the gap widened past 300x. But this owes mainly to the fixes put in place a decade ago, in an earlier crusade to reduce CEO pay. Comp critics wanted to tie CEO pay more closely to a company’s stock performance, so stock options came into vogue and, in the long bull run that followed, the rich got vastly richer.

(CNBC's Dennis Kneale and Larry Kudlow talk about recent market moves with Doug Kass, Seabreeze Partners Management; Jason Trennert, Strategas Research Partners in the video)

But trying, yet again, to ensure a corporate chieftain doesn’t earn “too much” money is a matter best left to boards and shareholders—not to politicians and union demogogues and irate day traders. (My favorite new tack: clawbacks.) Alas, I don’t hear anyone suggesting we cut the pay of other culprits in this crisis: Barney Frank and other lawmakers for inflating the Fannie-Freddie housing bubble; Securities and Exchange Commission chief Christopher Cox for letting risk run amok; and tens of thousands of people who lied about their finances to land super-cheap loans to buy more house than they could afford.

Oh no, that would be wrong—let’s take it out on the CEOs. It’s more fun that way.

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