Merrill Said to Cut Bonuses by 50% as Revenue Slumps

By Bradley Keoun and Jacqueline Simmons

Dec. 3 (Bloomberg) -- Merrill Lynch & Co. plans to cut year- end bonuses in half after more than $20 billion of losses that forced the U.S. securities firm to sell itself to Bank of America Corp., two people with knowledge of the situation said.

The average bonus reduction will be about 50 percent at the New York-based company, and some traders and investment bankers will face steeper cuts, said the people, who declined to be identified because the plans aren't public. While employees won't find out their bonuses until later this month, division managers are being told now how much they'll get to distribute.

Merrill's revenue through September fell 96 percent from a year earlier, forcing Chief Executive Officer John Thain to slash compensation -- the firm's biggest expense. Congressmen and regulators scrutinizing Wall Street pay have sought to ensure that economic-rescue funds from the U.S. government are used to stimulate lending and not to enrich executives.

The drop in bonuses at Merrill would be less severe than the 70 percent average cut for senior Wall Street executives that compensation consultant Johnson Associates predicted last month. Bonuses for rank-and-file workers may fall by 10 percent to 45 percent, according to Johnson.

Bonuses account for the bulk of a year's pay for most traders and investment bankers, and usually fall when markets sour.

Merrill spokeswoman Selena Morris declined to comment. The shares slipped 4.3 percent to $11.06 in New York trading today.

Shareholder Vote

A crisis of confidence sent Merrill shares plunging 36 percent in a single week during September, forcing the firm to sell itself to Charlotte, North Carolina-based Bank of America. Shareholders of both companies are scheduled to vote on the deal this week, with the closing targeted for the end of December.

Merrill and Bank of America were allotted a combined $25 billion of government money in October, when the Treasury Department agreed to invest $125 billion in nine of the biggest U.S. banks to bolster their dwindling capital.

Hit with mortgage-bond writedowns and plunging investment- banking fees, Merrill may report a loss this year of $13.3 billion, based on the average estimate of nine analysts surveyed by Bloomberg. That would be almost twice as wide as the $7.8 billion loss for 2007, then a record for the 94-year-old firm.

The company has dropped 78 percent this year in New York Stock Exchange composite trading and closed yesterday at $11.56.

Compensation Costs

Merrill's costs for compensation and benefits this year through September totaled $11.2 billion, down 3 percent from a year earlier. Although bonuses aren't paid until the end of the year, Wall Street firms usually estimate them in advance and account for a portion of the payout costs in each quarter.

Even if Merrill set aside nothing for compensation in the fourth quarter, the firm's 60,900 employees still would reap an average of $184,000 in compensation and benefits for the full year.

In 2007, Merrill paid out a total of $15.9 billion in compensation, or about $248,000 per employee.

Merrill's net revenue for the first nine months of this year totaled $834 million, or $13,695 per employee, compared with $19.4 billion in the 2007 period. The plunge in revenue stemmed from trading losses on bonds and other assets. The bulk of Merrill's writedowns came in the fixed-income-trading division, which contributed negative net revenue of $21.4 billion. Investment-banking net revenue plunged 25 percent to $2.58 billion.

Advisers' Commissions

Merrill's brokerage division, the biggest of its kind in the U.S. with 16,850 financial advisers, generated $10.2 billion of net revenue during the first nine months, down 2 percent from the prior year. Brokers don't depend on bonuses as traders and investment-bankers do, because their annual pay is based on a formula that's linked to sales.

Goldman Sachs Group Inc., Wall Street's most profitable firm, said last month Chief Executive Officer Lloyd Blankfein and six deputies would forgo year-end bonuses. Executives at Frankfurt-based Deutsche Bank AG and UBS AG in Zurich also have agreed to waive pay.

Merrill officials have declined to comment on bonuses for top executives, saying the payouts hadn't been set. Thain, 53, a former Goldman Sachs executive, received a $15 million bonus when he joined Merrill last December.

To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; Jacqueline Simmons in Paris at jackiem@bloomberg.net