"While working Americans are struggling to make ends meet, corporate chief executives who lose their jobs walk away with outsized pay packages. “When companies fail, should they give millions of dollars to their senior executives?” Rep. Henry Waxman, chairman of the U.S. House Oversight and Government Reform Committee, asked during a hearing featuring E. Stanley O’Neal, former chief executive of Merrill Lynch & Co. Inc., and two other top executives at the center of the financial crisis.

O’Neal lost his job as chairman and chief executive of Merrill Lynch last October, after the firm posted a $2.24 billion third-quarter loss due to a staggering $8.4 billion write-down on investments in junk mortgages and risky debt securities. The Wall Street firm posted an $8 billion loss for 2007 and shareholders saw the value of their shares drop more than 40 percent.

Yet O’Neal left with stock options, unvested shares, deferred compensation and pension payments worth more than $160 million. But O’Neal told lawmakers at the hearing that “I received no severance package. I received no bonus for 2007, no severance package, no ‘golden parachute.’” Instead, he said what he received was earnings from earlier years.

Much of this amount is in the form of unvested restricted stock and unexercised stock options granted over the six-year span of O’Neal’s tenure at Merrill Lynch. During this period, Merrill Lynch failed to outperform the Standard & Poor's (S&P's) 500 on an annual basis. The discrepancy between O’Neal’s generous compensation and his lackluster performance that led to some of the largest quarterly losses in his company’s history points to an executive compensation program that lacks accountability and rewards short-term gains at the expense of long-term value.

A look at Merrill Lynch’s proxy statements over O’Neal’s tenure as CEO shows that his compensation was not tied to risk-adjusted performance measures. Instead, it was driven by revenue, earnings growth and return on equity. The company’s 2007 proxy statement placed a high priority on return on equity. Such incentive compensation that is based on earnings and revenue, can “push for ‘sales’ without adequate concern for quality,” according to Nell Minnow, co-founder and editor at The Corporate Library, a corporate governance research firm. This can lead to CEO pay based on artificially inflated numbers.

The consequences of this lack of risk accountability can be seen in the direction the company took during O’Neal’s tenure. Since taking over, O’Neal slowly pushed Merrill Lynch into riskier businesses, in his quest for higher returns. During the housing boom, Merrill Lynch became increasingly involved in packaging and selling pools of securities tied to subprime mortgages, eventually increasing its exposure to these collateralized debt obligations (CDOs) to more than $40 billion in late 2007. CDOs repackage income from a pool of bonds or other investments.

Merrill Lynch became involved in the packaging and selling of a particular type of CDO called “Norma” that bet heavily on securities that were among the most vulnerable to a rise in defaults of subprime mortgage loans. While this increased returns, it also increased the chances that losses for investors would be magnified in the future. In underwriting risky CDOs such as “Norma,” Merrill Lynch earned fees as high as $15 million for a typical $1 billion CDO. From 2004-2007 Merrill Lynch became the top underwriter of CDOs and generated hundreds of millions of dollars in profits from packaging and selling mortgage CDOs.

These profits helped take O’Neal’s annual compensation to high levels. In 2006, at the height of the real estate bubble, he was paid $91 million. However, according to critics, Merrill Lynch’s high-risk strategy created little value for investors or the broader economy.

Once the housing bubble burst, home prices began to fall and defaults on mortgages rose. The value of subprime backed securities and CDOs such as “Norma” began to fall quickly. Financial instruments such as “Norma” became responsible for the tens of billions in write-downs at some of the world’s largest banks, including Merrill Lynch.

In the face of large losses, O’Neal approached Wachovia Corp. with a merger offer that was not authorized by Merrill Lynch’s board of directors. If this merger had been completed, O’Neal might have walked away with as much as $274 million. In the end, the merger did not go through, and ultimately O’Neal was forced out. Still, he made out well, walking away with $161 million.

Merrill Lynch shareholders are left with the consequences of O’Neal’s risk-taking. According to some analysts, the firm still faces uncertainty about its future and has sizable exposure to "some of the most toxic assets in the marketplace.""