Role for executives after merger is unclear

As Wells Fargo & Co. proceeds with its purchase of Wachovia Corp., it's unclear what role Wachovia's top executives will play in the new company.

The top leaders at Wachovia – the heads of the general bank, the investment bank, and the capital management unit – are due for severance payouts of up to $20 million each if they leave under certain circumstances after the Wells acquisition.

But chief executive Bob Steel asked that his employment agreement not include any severance provisions when he became CEO in July. He could still receive up to almost 2 million shares of restricted stock, but only if the stock price meets certain targets over the next six years. The value of his 1.5 million options to buy company stock are currently worthless. He indicated Wednesday that he won't stay on after Wachovia is sold.

Steel also indicated that Wachovia's other leaders will have “great opportunities” in the new company, but didn't give specifics. Both banks have said that details of what the new company will look like have not been worked out.

After the acquisition, Ben Jenkins, president of Wachovia's general bank; Steve Cummings, head of the investment bank; and David Carroll, head of capital management; could get payouts of up to $20 million each, including provisions for career transition services and insurance benefits. However, the value of their restricted stock options have shed millions of dollars this year.

Also, their severance payouts would be triggered only under certain circumstances. They will not get those severance payments if they stay on with the combined company, or if they are “terminated with cause.”

They would be eligible if they are “terminated without cause” or if they resign with “good reason,” such as a demotion.

Asked Wednesday about general complaints on executive compensation in his industry, Steel said “we're all ears” on “how we can do a better job, or (on) responsibility or compensation issues.”

Last year, Wachovia's senior officers did not receive cash bonuses. In 2006, its shareholders approved a proposal, which the board later adopted as policy, that essentially capped executives' future severance agreements at three times their annual salary and bonus.

Spokeswoman Christy Phillips-Brown said the Wachovia board's compensation committee “believes that employment agreements between Wachovia and each of its executive officers is an important component of attracting and retaining executive talent, including continuity of leadership, for the company.”

“Wachovia's management team has been and continues to be committed to the company and its constituencies, and ensuring the success of the Wells Fargo transaction,” she added.

Down Tryon Street, Bank of America Corp. will also have to deal with severance agreements for executives of Merrill Lynch & Co., which it decided to buy last month.

John Thain, who was named Merrill's CEO in November, and Nelson Chai, who was named chief financial officer in November, will have a significant portion of their sign-on stock awards vest after the Bank of America deal closes. That means Thain will have 924,000 shares vest, and Chai will have 150,000 shares vest. Those shares will vest whether they leave or stay with Bank of America. The bank has already announced that Thain will stay on, though it hasn't released many other details about the combined company.

Thursday, Merrill shares closed at $18.35.

In February, Merrill virtually eliminated severance agreements for its other top officers. A Merrill spokesman declined to comment on why the firm made that change, but it has been heavily criticized over the payout of former CEO Stan O'Neal, who was ousted last October. Merrill says his payout was based on previously earned compensation, not severance agreements.

Also, the previously awarded options of the other Merrill officers will vest if they leave the company after the Bank of America acquisition. Those options could be worth between $9 million and $15 million for each executive, based on Thursday's closing price – a significant drop from the end of 2007.

One final twist in the severance packages is the government's plan, announced this week, to buy equity stakes in banks including Wells Fargo, Bank of America and Merrill. Participating banks are prohibited from making “golden parachute” payments to executives while the government holds preferred shares in them.

It's not clear if this would prevent Wachovia from issuing severance payouts to its executives. The Treasury Department does not specify what would happen in a case like Wachovia's, where the buyer is participating in the government program but the acquired bank is not. However, if the roles were reversed – if Wachovia were the one participating in the government program – Wells would not be subject to the executive compensation rules just because of its purchase of Wachovia.