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Dear Shareholder:

 

We cordially invite you to attend our Annual Meeting of Shareholders. We will hold the meeting on Friday, April 27, 2007 at 10:00 a.m. Eastern time at the Merrill Lynch Hopewell Campus, 1550 Merrill Lynch Drive, Hopewell, New Jersey.

 

At the meeting, you will vote on a number of important matters described in the attached Proxy Statement.

 

Your vote is very important regardless of the number of shares you own. Even if you plan to attend the meeting in person, please vote your proxy by telephone, by the internet or by completing and returning your proxy card by mail so that we can be assured of having a quorum present to hold the meeting. Instructions on how to vote are included with your proxy card or have been forwarded to you by your bank, broker or other holder of record.

 

We look forward to your participation in the Annual Meeting, either through your proxy vote or your attendance at the meeting. If you need directions to the meeting location, or have a disability that may require special assistance, please contact our Corporate Secretary, Judith A. Witterschein, by mail at Merrill Lynch & Co., Inc., 222 Broadway, 17th Floor, New York, New York 10038-2510, by telephone at (212) 670-0432 or by e-mail at corporate_secretary@ml.com.

 

Sincerely,

 

 

STAN O’NEAL

Chairman and Chief Executive Officer

 

Notice of Annual Meeting of Shareholders
April 27, 2007

 

The 2007 Annual Meeting of Shareholders (Annual Meeting) of Merrill Lynch & Co., Inc. (Merrill Lynch or the Company) will be held on Friday, April 27, 2007 at 10:00 a.m. Eastern time at the Merrill Lynch Hopewell Campus, 1550 Merrill Lynch Drive, Hopewell, New Jersey.

 

At the Annual Meeting, you will be asked to:

 

 

The accompanying Proxy Statement describes the matters being voted on and contains other information relating to Merrill Lynch.

 

Shareholders as of 5:00 p.m. Eastern time on February 28, 2007 are entitled to vote at the Annual Meeting and any adjournment or postponement of the meeting.

 

By Order of the Board of Directors

 

JUDITH A. WITTERSCHEIN
Corporate Secretary

 

New York, New York

March 16, 2007

 

In addition to the notice provided as part of the proxy materials for this Annual Meeting, we included public notice of the date of the Annual Meeting in our Quarterly Report on Form 10-Q for the quarter ended September 29, 2006, which we filed with the Securities and Exchange Commission on November 3, 2006. We also have posted notice of the Annual Meeting on our Investor Relations website at www.ir.ml.com.

 

TABLE OF CONTENTS

 

	•	the election of three Directors to the Board of Directors, each for a three-year term;
	•	a proposal to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the 2007 fiscal year; and
	•	proposals submitted by shareholders.

	•	for the election of three Directors to the Board of Directors, each for a three-year term;
	•	for the proposal to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the 2007 fiscal year; and
	•	against all proposals submitted by shareholders.

	•	one vote for each of the 880,190,428 shares of our common stock, par value $1.33 1/3 per share, outstanding on the record date; and
	•	one vote for each of the 2,623,688 shares of exchangeable securities outstanding on the record date.

 

Merrill Lynch 2007 Proxy Statement 1  

	•	mail a new proxy card with a later date to Merrill Lynch & Co., Inc., c/o ADP, 51 Mercedes Way, Edgewood, NY 11717;
	•	vote again by telephone or the internet by 11:59 p.m. on April 26, 2007; or
	•	attend the Annual Meeting and vote in person.

	•	for the election of the three persons named under the caption “Nominees for Election to the Board of Directors;”
	•	for ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm; and
	•	against each of the shareholder proposals.

 

 2 Merrill Lynch 2007 Proxy Statement

	•	photo identification; and
	•	proof of ownership of your shares as of the record date, such as a letter or account statement from your bank or broker.

 

Merrill Lynch 2007 Proxy Statement 3  

 4 Merrill Lynch 2007 Proxy Statement

by mail at:		Judith A. Witterschein
		Corporate Secretary
		Merrill Lynch & Co., Inc.
		222 Broadway, 17th floor
		New York, NY 10038-2510
by e-mail at:		corporate_secretary@ml.com
or by telephone at:		(212) 670-0432

 

Merrill Lynch 2007 Proxy Statement 5  

 

Election of Directors

 

Our Board of Directors consists of 12 directors, divided into three classes. One class of Directors is elected each year and each class serves for a term of three years. Set forth below is information regarding each Director, which is based on materials each of them provided for this Proxy Statement.

 

The Board of Directors has nominated each of the persons named below for a three-year term ending in 2010. Each of the nominees has indicated his or her intention to serve if elected. Should any of the Director nominees be unable to take office at the Annual Meeting, your shares will be voted in favor of another person or other persons nominated by the Board of Directors. Each Director will hold office until his or her successor has been elected and qualified or until the Director’s earlier resignation or removal.

 

 

 6 Merrill Lynch 2007 Proxy Statement

 

The following Directors will continue to serve until 2008:

 

 

Merrill Lynch 2007 Proxy Statement 7  

 

The following Directors will continue to serve until 2009:

 

 

 8 Merrill Lynch 2007 Proxy Statement

 

The following directors will retire at the Annual Meeting in accordance with our Corporate Governance Guidelines:

 

Jill K. Conway, age 72, has served as a Director since 1978. Mrs. Conway is the Lead Independent Director of the Board of Directors. She has been a Visiting Scholar with the Massachusetts Institute of Technology since 1985; serves on the Boards of Directors of Colgate-Palmolive Company and NIKE, Inc.; and was President of Smith College from 1975 to 1985.

 

David K. Newbigging, age 73, has served as a Director since 1996. Mr. Newbigging has been Chairman of Synesis Life Limited, Synesis Pensions Limited and Synesis Finance Limited, U.K. - based entities which provide solutions for insurance and corporate pension fund liabilities, since 2006; and Chairman of the Board of Talbot Holdings Limited, a non-life insurance company whose operations are U.K. - based, since 2003. Mr. Newbigging was Chairman of the Board of Friends Provident plc, a U.K. - based life assurance company, from 2001 to 2005; Chairman of Friends’ Provident Life Office, a U.K. - based financial services group and the predecessor to the Friends Provident plc, from 1998 to 2001; Chairman of the Board of Equitas Holdings Limited, the parent company of a U.K. - based group of reinsurance companies, from 1995 to 1998; Chairman of the Board of Rentokil Group plc, a U.K. - based international support services company, from 1987 to 1994; and Chairman of the Board and Senior Managing Director of Jardine, Matheson & Co. Limited, a Hong Kong - based international trading, industrial and financial services group, from 1975 to 1983.

 

Merrill Lynch 2007 Proxy Statement 9  

 

The Audit Committee of the Board of Directors has appointed Deloitte & Touche LLP as our independent registered public accounting firm for the 2007 fiscal year. We are submitting the selection of our independent registered public accounting firm for shareholder ratification at the Annual Meeting.

 

The Audit Committee will consider the outcome of this vote in its decision to appoint an independent registered public accounting firm next year; however, since our By-Laws do not require that our shareholders ratify the appointment of our independent registered public accounting firm, the Audit Committee is not bound by the shareholders’ decision. Even if the selection is ratified, the Audit Committee, in its sole discretion, may change the appointment at any time during the year if it determines that such a change would be in the best interests of our Company and our shareholders.

 

A representative of Deloitte & Touche LLP will attend the Annual Meeting. The representative will be available to respond to appropriate questions from shareholders.

 

 

The Board of Directors recommends a vote FOR
the ratification of the appointment of Deloitte & Touche LLP
as our Independent Registered Public Accounting Firm.

 

Mrs. Evelyn Y. Davis, Watergate Office Building, 2600 Virginia Ave., N.W., Suite 215, Washington, D.C. 20037, who holds 900 shares of our common stock, has given notice of her intention to propose the following resolution at the Annual Meeting:

 

RESOLVED: “That the stockholders of Merrill Lynch, assembled in Annual Meeting in person and by proxy, hereby request the Board of Directors to take the necessary steps to provide for cumulative voting in the election of Directors, which means each stockholder shall be entitled to as many votes as shall equal the number of shares he or she owns multiplied by the number of Directors to be elected, and he or she may cast all of such votes for a single candidate, or any two or more of them as he or she may see fit.”

 

REASONS: “Many states have mandatory cumulative voting, so do National Banks.”

 

“In addition, many corporations have adopted cumulative voting.”

 

“Last year the owners of 277,099,555 shares, representing approximately 40.47% of shares voting, voted FOR this proposal.”

 

“If you AGREE, please mark your proxy FOR this resolution.”

 

 

The Board of Directors recommends a vote AGAINST
the adoption of Shareholder Proposal 1.

 

Management’s Statement in Opposition

 

A similar proposal has been rejected by our shareholders at each of our last 21 annual meetings.

 

 10 Merrill Lynch 2007 Proxy Statement

We believe that cumulative voting may:

 

 

We note that in order to minimize the risks of such divisiveness, and the consequent risk of possible different understandings of their responsibilities among our Directors, we, like most other major corporations, elect Directors by allowing each share of common stock to have one vote for each Board seat. We believe this method ensures that each Director is accountable to all of our shareholders and reduces the risk of factionalism on the Board.

 

To further ensure Director accountability to all of our shareholders, last year our Board adopted a majority voting policy. The policy provides that, in an uncontested election, any nominee for Director who receives more withhold votes than for votes shall promptly tender his or her resignation to the Board of Directors. See “Corporate Governance - Significant Board Practices - Voting for Directors” in this Proxy Statement for further information about our majority voting policy.

 

 

For the reasons stated above, the Board of Directors recommends a vote
AGAINST the adoption of Shareholder Proposal 1.

 

The AFSCME Employees Pension Plan, 1625 L Street, N.W., Washington, D.C., 20036, holder of 5,855 shares of common stock, has given notice of its intention to propose the following resolution at the Annual Meeting. Unitarian Universalist Association of Congregations, 25 Beacon Street, Boston, MA 02108, holder of 2,700 shares of our common stock; Congregation of Divine Providence, PO Box 37345, San Antonio, TX 78237, holder of 1,500 shares of our common stock; Congregation of Benedictine Sisters of Perpetual Adoration, Benedictine Monastery, 31970 State Hwy. P., Clyde, MO 64432-8100, holder of 820 shares of our common stock; and Congregation of the Sisters of Charity of the Incarnate Word, 4503 Broadway, San Antonio, TX 78209, holder of 5,200 shares of our common stock, have indicated their intention to co-sponsor this proposal.

 

RESOLVED, that shareholders of Merrill Lynch urge the board of directors to adopt a policy that Merrill Lynch shareholders be given the opportunity at each annual meeting of shareholders to vote on an advisory resolution, to be proposed by Company’s management, to ratify the compensation of the named executive officers (“NEOs”) set forth in the proxy statement’s Summary Compensation Table (the “SCT”) and the accompanying narrative disclosure of material factors provided to understand the SCT (but not the Compensation Discussion and Analysis). The proposal submitted to shareholders should make clear that the vote is non-binding and would not affect any compensation paid or awarded to any NEO.

 

Supporting Statement

 

In our view, senior executive compensation at Merrill Lynch has not always been structured in ways that best serve shareholders’ interests. For example, in 2005 Chairman and CEO Stanley O’Neal received $44,021 in tax gross-up benefits and $163,685 representing the cost for the “required” use of company aircraft. And each of the five named executive officers in the proxy statement received in excess of $15 million in total compensation for 2005.

 

Merrill Lynch 2007 Proxy Statement 11  

We believe that existing U.S. corporate governance arrangements, including SEC rules and stock exchange listing standards, do not provide shareholders with enough mechanisms for providing input to boards on senior executive compensation. In contrast to U.S. practices, in the United Kingdom, public companies allow shareholders to cast an advisory vote on the “directors’ remuneration report,” which discloses executive compensation. Such a vote isn’t binding, but gives shareholders a clear voice that could help shape senior executive compensation.

 

Currently U.S. stock exchange listing standards require shareholder approval of equity-based compensation plans; those plans, however, set general parameters and accord the compensation committee substantial discretion in making awards and establishing performance thresholds for a particular year. Shareholders do not have any mechanism for providing ongoing feedback on the application of those general standards to individual pay packages. (See Lucian Bebchuk & Jesse Fried, Pay Without Performance 49 (2004))

 

Similarly, performance criteria submitted for shareholder approval to allow a company to deduct compensation in excess of $1 million are broad and do not constrain compensation committees in setting performance targets for particular senior executives. Withholding votes from compensation committee members who are standing for reelection is a blunt and insufficient instrument for registering dissatisfaction with the way in which the committee has administered compensation plans and policies in the previous year.

 

Accordingly, we urge Merrill Lynch’s board to allow shareholders to express their opinion about senior executive compensation at Merrill Lynch by establishing an annual referendum process. The results of such a vote would, we think, provide Merrill Lynch with useful information about whether shareholders view the company’s senior executive compensation, as reported each year, to be in shareholder’s best interests.

 

We urge shareholders to vote for this proposal.

 

 

The Board of Directors recommends a vote AGAINST
the adoption of Shareholder Proposal 2.

 

Management’s Statement in Opposition

 

The proponent brought a similar proposal at last year’s annual meeting. That proposal was defeated by a substantial majority of the votes cast.

 

The Board recognizes our shareholders’ interest in executive compensation practices, and always exercises great care in determining and disclosing executive compensation. The Company is also in ongoing direct communication with its shareholders and the Chair of the Management Development and Compensation Committee (MDCC) and the Lead Independent Director have made themselves available for direct communication with shareholders.

 

The MDCC follows a performance-based discipline in determining compensation for the Chief Executive Officer (CEO) and other top executives. At the beginning of the year, the MDCC establishes quantitative and qualitative objectives for the CEO and other executives for the coming year based upon agreed plans for continued growth and the delivery of shareholder value. These objectives include specific financial targets and specified progress towards other strategic and leadership goals. In determining annual CEO compensation, the MDCC exercises its judgment based upon a review of financial measures and an assessment of performance against these objectives. This involves consideration of overall firm financial results and the MDCC’s assessment of the Company’s financial performance relative to its competitors. The MDCC also examines actual and projected peer group compensation amounts to refine its analysis and arrive at a final determination. In order to align executive and shareholder interests and support long-term value creation, 60% of total annual compensation is paid in stock

 

 12 Merrill Lynch 2007 Proxy Statement

that is subject to forfeiture during a four-year vesting period. An evaluation of CEO compensation in light of the growth in earnings per share over the last four years demonstrates the linkage of pay to performance.

 

In 2006, our Company completed the most successful year in its history, reflecting the successful execution of our growth strategy. We reported record full year net revenues, net earnings and earnings per diluted share on an operating basis (excluding the one-time net gain arising from the closing of the merger between Merrill Lynch Investment Managers and BlackRock, Inc. in the third quarter and the one-time non-cash compensation costs recorded in the first quarter). Net revenues grew to $32.7 billion, up 26% from 2005 and our net earnings were $7.6 billion, up 48%. On the same basis, diluted earnings per share increased to $7.68, up 49% from the prior year and return on equity increased by 5.6 percentage points to 21.6%. These results were reflected in our stock price, which increased 37.5% during the year. We also announced a 40% dividend increase on January 18, 2007.

 

The proponent urges adoption of the proposal noting that, in the United Kingdom, the Directors’ remuneration report is submitted for a vote by shareholders. We understand that, rather than advocating a broad based application of this practice to all U.S. companies, the proponent has introduced the proposal at a small number of U.S. companies, including Merrill Lynch. We are concerned that adopting this practice at Merrill Lynch alone could put our Company at a competitive disadvantage in recruiting and retaining talent and negatively affect shareholder value. For further information, see “Executive Compensation - Compensation Discussion and Analysis” in this Proxy Statement.

 

 

For the reasons stated above, the Board of Directors recommends a vote
AGAINST the adoption of Shareholder Proposal 2.

 

The AFL - CIO Reserve Fund, 815 Sixteenth Street, N.W., Washington, DC 20006, holder of 600 shares of our common stock, has given notice of its intention to propose the following resolution at the Annual Meeting:

 

RESOLVED, that the shareholders of Merrill Lynch & Company, Inc. (the “Company”) urge the Board of Directors to adopt a policy that a significant portion of future equity compensation grants to senior executives shall be shares of stock that require the achievement of performance goals as a prerequisite to vesting (“performance-vesting shares”).

 

This policy shall apply to existing employment agreements and equity compensation plans only if the use of performance-vesting shares can be legally implemented by the Company, and will otherwise apply to the design of all future plans and agreements.

 

Supporting Statement

 

We believe that our Company’s compensation policies should encourage the ownership of stock by senior executives in order to align their interests with those of shareholders. To achieve this goal, we favor granting senior executives actual shares of stock that vest only after meeting specified performance goals. In our opinion, performance-vesting shares are a better form of equity compensation than fixed-price stock options or time-vesting restricted stock.

 

Fixed-price stock option grants provide senior executives with incentives that may not be in the best interests of long-term shareholders. In our view, stock option grants promise executives all the benefit of share price increases with none of the risk of share price declines. This asymmetrical incentive structure can reward executives for share price volatility, a measure of investment risk. Stock options can also reward short-term decision-making because many executives’ options can be exercised just one year after the grant date.

 

Merrill Lynch 2007 Proxy Statement 13  

Furthermore, we believe that stock options can create a strong incentive to manipulate a company’s stock price through questionable or even fraudulent accounting.

 

Leading investors and regulators have questioned the use of stock options to compensate executives. Berkshire Hathaway CEO Warren Buffet has characterized fixed-price stock options as “really a royalty on the passage of time.” Former Federal Reserve Chairman Alan Greenspan blamed poorly-structured options for the ‘infectious greed’ of the 1990s, because “they failed to properly align the long-term interests of shareholders and managers.”

 

Similarly, we oppose granting executives time-vesting restricted stock that does not include any performance requirements. In our view, time-vesting restricted stock rewards tenure, not performance. Instead, we believe vesting requirements should be tailored to measure each individual executive’s performance through disclosed benchmarks, in addition to the Company’s share price. To align their incentives with those of long-term shareholders, we also believe that senior executives should be required to hold a significant portion of these performance-vesting shares for as long as they remain executives of the Company.

 

Executive compensation consultant Pearl Meyer has said “if a company is going to issue restricted stock grants as a way of making sure executives are owners rather than optionees, the grant should be earned on a performance basis - it shouldn’t be just a giveaway.” Former SEC chairman Richard Breeden has stated that “there is not a strong reason for granting restricted stock rather than simply paying cash unless there are performance hurdles to vesting.”

 

 

The Board of Directors recommends a vote AGAINST
the adoption of Shareholder Proposal 3.

 

Management’s Statement in Opposition

 

The Management Development and Compensation Committee of the Board (MDCC) applies a strict performance-based discipline in determining compensation for our Chief Executive Officer and other top executives. As described in “Executive Compensation - Compensation Discussion and Analysis” in this Proxy Statement, our compensation programs emphasize pay for performance by paying more than 95% of total annual compensation for our executives in the form of an annual bonus tied directly to the achievement of individual, business unit and overall Company performance measured against objectives that are established at the beginning of the year. Moreover, instead of paying this bonus all in cash, we deliver 60% of total annual compensation in the form of stock awards that vest over a four-year period. This practice emphasizes stock ownership to support alignment with shareholders in a business that involves taking risk in financial markets that are often volatile. It also supports retention of key executives in the face of intense competitive pressure. For further information about competition for talent in the securities industry, see “Executive Compensation - Compensation Discussion and Analysis - Introduction” in this Proxy Statement.

 

Since our stock awards are fundamentally part of annual pay for the achievement of concrete results in the prior fiscal year, tying a portion of the awards to future performance presents certain risks. Linking a large portion of the award to an additional future financial measure would amount to a requirement that the executive “earn it again.” Such a requirement could lead to the departure of key employees in light of the competitive environment for talent in our industry. Awards based upon future performance typically need to be incremental to an industry competitive bonus or provide significant potential upside to counter the risk of loss. In addition, because our industry is cyclical and the markets we operate in can be highly volatile, overemphasizing this type of award can have unintended and adverse consequences. If markets turn down and the awards perform poorly, competitive pressure could result in executive departures or create the need to pay additional current compensation, while exceptional performance could lead to a windfall.

 

 14 Merrill Lynch 2007 Proxy Statement

In 2006, we introduced the Managing Partner Incentive Program (MPP), a three-year performance-based program designed to increase our annual return on equity (ROE) for our 2006, 2007 and 2008 fiscal years over ROE for 2005. Participants and the Company each contribute to the program, by means of a reduction of annual stock based bonus awards and a Company match. The awards are subject to reduction or complete forfeiture if certain ROE goals are not met, but there is also upside opportunity if target goals are exceeded. The MPP is more fully described in “Executive Compensation - Compensation Discussion and Analysis - Long-Term Performance Based Awards - Managing Partner Incentive Program (MPP)” in this Proxy Statement. In its first year, the MPP has helped drive a 5.6 percentage point improvement in ROE and a 37.5% increase in the stock price, increasing our market capitalization by approximately $20 billion.

 

Management and the MDCC are continuing to explore approaches to providing incentives for long-term objectives through performance-based programs to follow the first MPP. We believe that the MPP, coupled with our disciplined performance-based approach to annual pay, is responsive to the proponent’s objectives while at the same time takes into account the unique industry factors discussed above. Further, we believe that it is essential for the MDCC to retain its ability to design and implement compensation programs that enable us to attract and retain the executives necessary for our success.

 

 

For the reasons stated above, the Board of Directors recommends a vote
AGAINST the adoption of Shareholder Proposal 3.

 

Merrill Lynch 2007 Proxy Statement 15  

 

The Board of Directors believes that good corporate governance is a critical factor in achieving business success and has long adhered to best practices in corporate governance in fulfilling its responsibilities to shareholders. Highlights of our corporate governance practices are described below. For further information, please refer to the Corporate Governance Website.

 

 

 

The following table describes, by category, the transactions and relationships that were evaluated by the Board in reaching its determination that each of the non-management Directors is independent. In all cases, payments, revenues or contributions referred to in the table involved amounts well below the thresholds contained in the Director Independence Standards. In addition, the contributions referred to in the table, which do not include contributions made as part of our broad-based matching gifts program, were made in the ordinary course of our corporate charitable giving and represent an immaterial portion of such charitable giving. In 2006, we contributed to more than 3,000 not-for-profit organizations.

 

 16 Merrill Lynch 2007 Proxy Statement

Key to Descriptions of Client Relationships and Charitable Contributions:

 

 

 

 

Merrill Lynch 2007 Proxy Statement 17  

 

In January 2006, the Board of Directors determined that Heinz-Joachim Neubürger, a former Director, was independent. In making its determination, the Board reviewed payments between the Company and Siemens AG and brokerage services provided by the Company to Mr. Neubürger in the ordinary course of business on non-preferential terms. Mr. Neuburger had no relationships with the Company except those that the Board has determined to be categorically immaterial as set forth in the Director Independence Standards. Mr. Neubürger resigned from the Board on May 1, 2006 concurrent with his resignation as Chief Financial Officer of Siemens AG, in accordance with our Corporate Governance Guidelines.

 

 

 

 

 18 Merrill Lynch 2007 Proxy Statement

 

 

SEC rules require that we identify any Related Party Transactions that do not require review, approval or ratification under our policy or any situations where such policies and procedures have not been followed. There were no such transactions or situations since the beginning of the 2006 fiscal year.

 

 

 

 

Merrill Lynch 2007 Proxy Statement 19  

 

 

Jill K. Conway currently serves as the Board’s Lead Independent Director.

 

 

 

 

 20 Merrill Lynch 2007 Proxy Statement

 

 

 

The Nominating and Corporate Governance Committee has adopted Board Candidate Guidelines that describe the attributes and qualifications considered by the Committee in evaluating Director nominees. The Board Candidate Guidelines are an exhibit to our Corporate Governance Guidelines, which you can find on the Corporate Governance Website and can request from our Corporate Secretary. Among the attributes the Committee considers are: (i) management and leadership experience; (ii) a skilled and diverse background; (iii) integrity

 

Merrill Lynch 2007 Proxy Statement 21  

and professionalism; (iv) financial expertise and prior public company audit committee service; (v) financial markets knowledge; (vi) consumer markets knowledge; and (vii) international experience.

 

Members of the Nominating and Corporate Governance Committee, other members of the Board of Directors or members of executive management or shareholders may, from time to time, identify individuals for consideration as potential Director nominees. A shareholder may identify a Director candidate for consideration by the Nominating and Corporate Governance Committee by writing to our Corporate Secretary. The Committee will consider all proposed nominees in light of our Board Candidate Guidelines and the assessed needs of the Board at the time.

 

Any shareholder who wishes to propose a Director nominee for election to the Board at the Annual Meeting must ensure that written notice is received by our Corporate Secretary not less than 50 days or more than 75 days before the Annual Meeting. Such notice must be provided by the holder of record. Any shareholder who holds shares through a bank, broker or other holder of record must instruct the record holder to submit the required notice in a timely manner. The notice must include:

 

 

The Nominating and Corporate Governance Committee has retained a director search firm to work with the Committee in identifying potential nominees for election to the Board. The firm identifies and evaluates potential candidates believed to possess the qualifications and characteristics identified in our Board Candidate Guidelines and by the Committee. The firm also provides background information on the potential Director nominees and, if so directed by the Committee, makes the initial contact to assess the potential candidate’s interest in exploring a Board candidacy.

 

Based upon the recommendation of the Nominating and Corporate Governance Committee, the Board has nominated John D. Finnegan, Joseph W. Prueher and Ann N. Reese for election to the Board of Directors for a three-year term expiring in 2010. Mr. Finnegan has served on the Board since 2004 and was initially recommended as a Board candidate by our Chief Executive Officer. Admiral Prueher has served on the Board since 2001 and was re-elected by shareholders to a three-year term in 2004. Mrs. Reese has served on the Board since 2004 and was initially recommended to the Nominating and Corporate Governance Committee as a Board candidate by one of our non-management Directors.

 

There were no nominees for election as Directors at the 2006 annual meeting that were submitted by shareholders (or shareholder groups) owning more than 5% of our common stock.

 

Shareholders and other interested parties may communicate with the Board of Directors, non-management Directors and Committees of the Board of Directors by writing to the Board, in care of our Corporate Secretary. All written submissions that appear to be good faith efforts to communicate with Board members about matters involving the interests of Merrill Lynch and our shareholders are collected and forwarded on a periodic basis to the Board of Directors along with a summary of our actions in response to the submissions. Concerns relating to accounting, internal accounting controls or auditing matters are brought immediately to the attention of our Corporate Audit Department and are handled in accordance with the procedures established by the Audit Committee with respect to such communications.

 

 22 Merrill Lynch 2007 Proxy Statement

 

Membership and Meetings.  The Board of Directors has appointed five standing committees: the Audit Committee; the Finance Committee; the Management Development and Compensation Committee; the Nominating and Corporate Governance Committee; and the Public Policy and Responsibility Committee. Each of these Board Committees consists entirely of independent Directors and operates under a written charter, which sets forth the Committee’s authorities and responsibilities. For information on how to obtain a copy of any Committee charter, see “Questions and Answers – How can I obtain copies of Merrill Lynch’s corporate governance documents?” in this Proxy Statement.

 

The following table shows the current membership of each of our Board Committees during the 2006 fiscal year.

 

 

Descriptions.  A brief description of our Board Committees and certain of their principal functions are set forth in the following sections. The descriptions are qualified in their entirety by the full text of the Board Committee charters.

 

The Audit Committee consists of five of our independent Directors, each of whom meets the requirements for independence, experience and expertise, including financial literacy, set forth in the applicable rules of the SEC and the NYSE.

 

David K. Newbigging, the Chair of the Audit Committee since 2002, has served as a member of the Audit Committee since he joined the Board of Directors in 1996 and served as Chair of the Finance Committee from 2002 through 2005. The Board of Directors has determined that Mr. Newbigging has accounting or related financial management expertise. Mr. Newbigging has an extensive financial background. He joined Jardine, Matheson Group (Jardine), a diversified trading company headquartered in Hong Kong, in 1954. He served in several countries in the Asia Pacific Region, becoming Managing Director in 1970 and Chairman and Chief Executive Officer of Jardine in 1975. While serving in these positions, Mr. Newbigging supervised individuals responsible for Jardine’s financial statements. Jardine became a publicly listed company in 1961 and has grown into a multinational diversified company with a number of publicly listed subsidiaries and associates in several jurisdictions. Following his retirement from Jardine, Mr. Newbigging relocated to the United Kingdom in 1984. Since then he has been a director and Chairman of several publicly listed companies including Rentokil Group and Friends Provident plc, which are both constituents of the FTSE 100 on the London Stock Exchange. Mr. Newbigging was Chairman of the Audit Committee before being appointed Chairman of the Board of each of Rentokil Group and Friends Provident plc. He also served on the Board and Audit Committee of Ocean Energy Inc., a publicly listed U.S. company, and its predecessor company, from 1987 until 2003 and served on the Board of PACCAR Inc., a publicly listed U.S. company, from 1999 to 2006. Mr. Newbigging has been active in

 

Merrill Lynch 2007 Proxy Statement 23  

the not-for-profit sector in the United Kingdom. He currently serves as Chairman of Trustees of a large U.K.-registered charity, and has also served as a member of the Audit Committee of that charity. Mr. Newbigging also currently serves as Chairman of Talbot Holdings Limited, a non-life insurance company whose operations are based in the United Kingdom and Synesis Life Limited, Synesis Pensions Limited, and Synesis Finance Limited, entities that provide solutions for insurance and corporate pension fund liabilities, whose operations are based in the United Kingdom.

 

The Board has determined that two of our Audit Committee members – Mrs. Reese and Mr. Rossotti – are audit committee financial experts as defined in the SEC rules. The SEC rules provide that audit committee financial experts do not have any additional duties, obligations or liabilities and are not considered experts under the U.S. Securities Act of 1933.

 

The Audit Committee met 12 times during the 2006 fiscal year. This Committee:

 

 

The Finance Committee currently consists of four of our independent Directors and met nine times during the 2006 fiscal year. This Committee:

 

 

 24 Merrill Lynch 2007 Proxy Statement

 

The Management Development and Compensation Committee (MDCC) consists of five of our independent Directors. Each of these Directors meets the criteria for independence set forth in the NYSE rules, the definition of “Non-Employee Director” set forth in Rule 16b-3 under the U.S. Securities and Exchange Act of 1934 and the definition of “outside director” set forth in the regulations promulgated under Section 162(m) of the Internal Revenue Code. The Committee met eight times during 2006. This Committee:

 

 

Merrill Lynch 2007 Proxy Statement 25  

 

 

Compensation Processes and Procedures.  The MDCC is responsible for approving the compensation paid to the CEO and all other members of executive and senior management, including the CFO. The compensation for the rest of our employees is the responsibility of management, with general oversight from the MDCC.

 

The MDCC approves annual financial, strategic and leadership performance objectives for the CEO. The CEO’s performance objectives include elements highlighted in the Company’s annual operating plan described below and many of the key objectives of the other members of the executive management team, including the named executive officers. During the course of the year, the MDCC reviews the performance of the executive management team against these objectives. This review serves as a basis upon which the MDCC determines the compensation of the CEO and our executive management team. The MDCC also reviews our performance against the performance of our competitors and against the agreed strategic priorities described below. As part of this process, the MDCC also reviews the quarterly bonus accruals made for performance-based compensation throughout the year and authorizes all awards under equity-based compensation plans.

 

Setting Annual Performance Objectives.  Prior to the beginning of each fiscal year, our executive management team develops an annual operating plan for achieving continued growth and the delivery of shareholder value. This plan covers the anticipated performance of our major operating businesses based on reasonable assumptions about market conditions and sets forth the strategic and financial goals for the coming year. This plan is developed by executive management and is subsequently presented to our Board of Directors for approval. The annual operating plan represents executive management’s best estimate of our expected performance based on its assessment of market conditions. The operating plan forms the basis of the CEO’s financial objectives to which are added agreed upon strategic and leadership objectives (that can be short term or span more than one year).

 

 

The MDCC considers the proposed CEO objectives at its meetings held in January of each year and discusses the objectives with its compensation consultant and with the CEO. The MDCC then meets in private session, without management, to consider and approve the proposed CEO objectives which are subsequently reviewed with the full Board. At each of its meetings throughout the year, the MDCC reviews year-to-date accomplishments and progress against these objectives. At year end, the MDCC uses these objectives in assessing the annual performance of the CEO, the Executive Vice Presidents and the CFO. This assessment is the foundation of the MDCC’s annual determination of compensation that is described under the heading “Executive Compensation – Compensation Discussion and Analysis” in this Proxy Statement.

 

 26 Merrill Lynch 2007 Proxy Statement

 

MDCC Compensation Consultant.  Since 2003, the MDCC has engaged a consultant from Towers Perrin to provide independent advice to the Committee on executive compensation matters. The Towers Perrin consultant reports directly to the MDCC and attends most MDCC meetings, including private sessions relating to executive compensation. Towers Perrin only provides advice – all actions and decisions regarding the compensation of the named executive officers are made by the MDCC. Under an agreement with the MDCC, Towers Perrin’s consulting fees for the MDCC are based solely on hourly billings for assignments commissioned by the MDCC. During 2006, Towers Perrin provided discrete, routine consulting services to two of the Company’s business units, and the Company purchased certain generic compensation reports from Towers Perrin, unrelated to executive compensation. The Towers Perrin MDCC consultant and his team were not involved in providing any of these other products or services. Merrill Lynch has been advised by Towers Perrin that the fees for these matters represented less than one-tenth of one percent of its 2006 revenues. The MDCC has reviewed these limited services and determined that they do not affect Towers Perrin’s ability to provide independent advice to the MDCC on executive compensation matters.

 

The Nominating and Corporate Governance Committee consists of six of our independent Directors, each of whom meets the requirements for independence set forth in the NYSE rules. The Nominating and Corporate Governance Committee met eight times during the 2006 fiscal year. This Committee:

 

 

The Public Policy and Responsibility Committee consists of four of our independent Directors and met three times during the 2006 fiscal year. This Committee oversees the Corporation’s activities as a socially responsible corporation in light of the economic, social, political and other developments around the world, including:

 

 

In assessing policies and activities, the Committee considers the interests of our stockholders, among others, and the ethical principles expected of a socially responsible corporation, including Client Focus, Respect for the Individual, Teamwork, Responsible Citizenship and Integrity.

 

Merrill Lynch 2007 Proxy Statement 27  

 

The Audit Committee is comprised of five independent Directors and operates under a written charter. The Audit Committee held 12 meetings in 2006. The meetings facilitated communication with senior management and employees, the internal auditors and Deloitte & Touche LLP (Deloitte & Touche), the Company’s independent registered public accounting firm. The Audit Committee held discussions with the internal auditors and Deloitte & Touche, both with and without management present, on the results of their audits and the overall quality of the Company’s financial reporting and internal controls.

 

The Audit Committee has the sole authority to appoint or replace the independent registered public accounting firm and is directly responsible for the oversight of the scope of its role and the determination of its compensation. The Audit Committee regularly evaluated the performance and independence of Deloitte & Touche and, in addition, reviewed and pre-approved all services provided by Deloitte & Touche, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively, the Deloitte Entities) during 2006. The Audit Committee also has considered whether the provision of non-audit services by the Deloitte Entities is compatible with maintaining Deloitte & Touche’s independence.

 

As stated in its charter, the Audit Committee’s role is one of oversight. It is the responsibility of Merrill Lynch’s management to establish and maintain a system of internal control over financial reporting, to plan and conduct internal audits and to prepare consolidated financial statements in accordance with U.S. generally accepted accounting principles. It is the responsibility of Merrill Lynch’s independent registered public accounting firm to audit those financial statements and opine upon the effectiveness of the internal control over financial reporting as of each fiscal year end. The Audit Committee does not provide any expert or other special assurance as to the Company’s financial statements or any expert or professional certification as to the work of the Company’s independent registered public accounting firm.

 

In fulfilling its responsibilities, the Audit Committee has met and held discussions with management and Deloitte & Touche regarding the fair and complete presentation of Merrill Lynch’s financial results. The Audit Committee has discussed significant accounting policies applied by the Company in its financial statements, as well as alternative treatments. The Audit Committee has met to review and discuss the annual audited and quarterly condensed consolidated financial statements for Merrill Lynch for the 2006 fiscal year (including the disclosures contained in the Company’s 2006 Annual Report on Form 10-K and its 2006 Quarterly Reports on Form 10-Q, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) with Merrill Lynch’s management and Deloitte & Touche. The Audit Committee also reviewed and discussed with management, the internal auditors and Deloitte & Touche, the reports required by Section 404 of the Sarbanes-Oxley Act of 2002, namely, management’s annual report on the Company’s internal control over financial reporting and Deloitte & Touche’s associated attestation reports.

 

The Audit Committee has discussed with Deloitte & Touche the matters required to be discussed by professional and regulatory requirements, including, but not limited to, Statement of Auditing Standards No. 61, as amended and adopted by the Public Company Accounting Oversight Board. In addition, the Audit Committee has received written disclosures and the letter from Deloitte & Touche as required by Independence Standards Board Standard No. 1, “Independence Discussions with Audit Committees,” as modified or supplemented, and has discussed with Deloitte & Touche its independence from the Company and its management.

 

In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements for Merrill Lynch as at and for the fiscal year ended December 29, 2006 be included in the Company’s 2006 Annual Report to Shareholders and incorporated by reference into the Company’s 2006 Annual Report on Form 10-K.

 

Audit Committee

 

David K. Newbigging, Chairman

Judith Mayhew Jonas

Joseph W. Prueher

Ann N. Reese

Charles O. Rossotti

 

 28 Merrill Lynch 2007 Proxy Statement

 

Consistent with SEC rules regarding the independence of our registered public accounting firm, the Audit Committee has established a policy governing the provision of audit and non-audit services.

 

Pursuant to this policy, the Audit Committee annually considers and, if appropriate, approves the provision of audit services to the Company by the independent registered public accounting firm and by any other accounting firm proposed to be retained to provide audit services (e.g., in compliance with a foreign statute). The Audit Committee also considers and, if appropriate, pre-approves the provision of services by the independent registered public accounting firm that fit within the following categories of permitted audit, audit-related, tax and all other services within a specified dollar limit. The services that may be performed by the independent registered public accounting firm, with approval of the Audit Committee, are defined in the policy as follows:

 

 

Any proposed engagement of our independent registered public accounting firm that does not fit within one of the pre-approved categories of service or is not within the established fee limits must be specifically pre-approved by the Audit Committee.

 

The Audit Committee has delegated pre-approval authority to the Chair of the Audit Committee in time-sensitive cases. The exercise of such authority must be reported to the Audit Committee at its next regularly scheduled meeting. The Audit Committee regularly reviews summary reports detailing all services, related fees and expenses provided to us by the independent registered public accounting firm.

 

Merrill Lynch 2007 Proxy Statement 29  

 

The following table presents aggregate fees billed for audits of our consolidated financial statements and fees billed for audit-related and non-audit services rendered by Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates for the fiscal years ended December 29, 2006 and December 31, 2005. In pre-approving 100% of the services generating fees in 2006 and 2005, the Audit Committee has not relied on the de minimis exception to the SEC’s pre-approval requirements applicable to the provision of audit-related, tax and all other services provided by the independent registered public accounting firm.

 

 

 

 

 30 Merrill Lynch 2007 Proxy Statement

Ownership by Our Directors and Executive Officers

 

We believe that share ownership by Directors, officers and employees helps to align their interests with the interests of shareholders. We also believe that this alignment has been an important factor in the long-term returns we have achieved for our shareholders.

 

The following table contains information about the beneficial ownership of our common stock by each of the Directors, the Chief Executive Officer and the named executive officers and by all Directors and named executive officers considered as a group. In addition, we have provided information about ownership of stock-linked instruments that provide economic exposure to our common stock but do not represent actual beneficial ownership of shares. This information is as of February 28, 2007, the record date.

 

Amount and Nature of Beneficial Ownership

 

 

 

 

Merrill Lynch 2007 Proxy Statement 31  

 

Except as described below, we know of no person or entity that beneficially owns more than 5% of our outstanding common stock.

 

 

 

 

 

 

 

 32 Merrill Lynch 2007 Proxy Statement

 

 

 

The Management Development and Compensation Committee of the Merrill Lynch Board of Directors (MDCC) is comprised of five independent Directors and operates under a written charter. The MDCC held eight meetings in 2006. The MDCC met both with and without management present and the MDCC’s independent compensation consultant from Towers Perrin attended most of these meetings, including the private sessions.

 

In fulfilling its responsibilities, the MDCC reviewed the section of this Proxy Statement entitled “Compensation Discussion and Analysis” (CD&A), as prepared by management of the Company, with management of the Company and the MDCC’s independent compensation consultant and provided comments on its content.

 

Based on the review and discussions described above, the MDCC recommended to the Board of Directors that the CD&A be included in the Proxy Statement for the Company’s 2007 Annual Meeting of Shareholders.

 

Management Development and Compensation Committee

 

Alberto Cribiore, Chairman
Armando M. Codina
Jill K. Conway
John D. Finnegan
Aulana L. Peters

 

None of the members of the MDCC has ever been an officer of Merrill Lynch or any of its subsidiaries and no “compensation committee interlocks” existed during the 2006 fiscal year.

 

Merrill Lynch 2007 Proxy Statement 33  

 

Introduction

 

The securities industry is highly competitive in its pursuit of business opportunities and also in the recruitment and retention of top talent. This competition for talent reflects a fundamental characteristic that distinguishes securities-related businesses from other financial services activities. These companies strive to deliver incremental returns for their shareholders and clients that exceed those of the broader universe of financial firms - and the quality of intellectual capital available to them is a key ingredient for achieving superior returns.

 

Compensation expense is considered to be the most critical expense for the securities industry, much in the way expenditures for plant and equipment or research and development are critical for other industries. For Merrill Lynch and the other firms in our Peer Group (as defined below), compensation expense generally accounts for between 40% and 50% of net revenues. Compensation expense typically follows the increase or decrease in net revenues at a firm, reflecting the connection of incentive-based pay to the overall performance of the company.

 

Merrill Lynch operates in the most innovative and vibrant segments of the global financial services industry. Our employees - our human capital - are central to the value that Merrill Lynch creates for our clients and shareholders. This has always been the case, but there are also several recent factors and trends which increase the importance of, and demand and competition for, human capital in our industry.

 

Components of our business model, and why human capital is such an important component

 

Merrill Lynch’s business involves several different, but related, elements: the creation and delivery of customized solutions that enable our clients to achieve their financial and business goals; the management of complex financial risks; and the deployment of shareholder and client capital with the goal of achieving superior returns.

 

The primary ingredients for success in our business are people and capital. Our employees provide relationships, intellect, creativity and agility in the identification and execution of business opportunities - and capital, belonging to our clients and shareholders, is the raw material of the global markets in which we operate. Unlike some other industries where real estate, plant and machinery, or other tangible assets are more prominent factors of production, in our business it is primarily financial capital and human capital that create the value. And it is to the providers of that capital - clients, shareholders and employees - that the returns from our business performance accrue.

 

Decisions regarding the company’s aggregate compensation levels take account of the need to balance returns to the providers of human and financial capital. Our compensation structure provides the framework to reward our human capital - our employees - for their contribution to our success. The essential nature of their role in value creation is reflected in the industry’s compensation policies and levels, which tend to be highly incentive-driven and reflect generally high levels of compensation for many employees and, in particular, for key executives and producers. Similarly, return on total capital employed is a key management focus and the return expectations of our shareholders, though variable due to the cyclical nature of our industry, tend to be relatively high. Correspondingly, returns to shareholders in our industry generally are higher than in many others.

 

Just as we strive to deliver competitive returns on our financial capital, our compensation framework must also remain competitive to retain and develop talented employees to serve client and shareholder interests. In our industry, employee talents are relatively easily transferred from one employer to another, and there is continual competitive activity to recruit talented individuals with valuable experience.

 

Although there are some public companies with similar business models, mainly those within our Peer Group, some of the more comparable activities are conducted by private companies and partnerships, including private

 

 34 Merrill Lynch 2007 Proxy Statement

equity firms and hedge funds. These entities actively compete for talented financial services professionals, offering them highly attractive alternative compensation opportunities. There is also strong demand for senior financial services professionals to manage the portfolio companies owned by private equity firms.

 

Recent trends in the structure and operating model of the financial industry have intensified the competition for talented financial professionals.

 

The overall demand for experienced financial services professionals continues to grow as globalization has led to capital markets expansion and innovation in both developed and emerging markets. In particular the demand for scarce, specialist risk management, product development and trading skills has grown significantly as the importance of capital deployment in global markets and investment banking activities has increased. Global capital markets are expanding rapidly in sophistication, depth and diversity as financial services innovation is a priority for most developing economies. This growth in financial markets is a key ingredient in the successful development of the global economy and has led to increased demand for financial services professionals with global experience and capabilities.

 

New business models provide alternative, entrepreneurial opportunities for talented financial services professionals. Examples include the growth in hedge funds (there are now more than 9,000 hedge funds globally) and the development of independent financial advisors, both of which have benefited from technological innovation that has lowered entry costs and enabled the efficient outsourcing of costly back-office functions. With the emergence of these new business models, relationships between individuals are often as important as relationships between institutions. The range of options for individuals and select teams is sustaining growth in compensation levels and providing a new benchmark of entrepreneurial opportunity, often within private organizations, against which many employees calibrate their career and compensation choices.

 

Technological innovation has also led to reduced margins in several traditional elements of the financial services business so that increasingly, the success of our business is tied to employee-driven innovation in the deployment of capital to generate incremental returns for clients and shareholders.

 

The competitive environment influences the structure, as well as the absolute level, of compensation for key executives and producers.

 

In light of the factors outlined above, Merrill Lynch applies a compensation framework that emphasizes variable pay, uses substantial stock-based compensation to support alignment with stockholders and retention of employees and ensures that compensation opportunities are competitive in the markets in which we operate. Merrill Lynch has a long-standing practice of emphasizing stock as a substantial component of compensation for its key executives and producers. This practice promotes an alignment of interests between shareholders and employees and fosters an ownership culture, which increases employee focus on returns across the economic and business cycles. Stock-based compensation also provides a risk/reward profile comparable to the entrepreneurial opportunities available at private competitors, in that total rewards are driven in large measure by the ability to generate superior returns. We believe that our shareholders are also well served by the use of stock compensation because of the retention value inherent in the vesting period.

 

Compensation Rationale and Objectives

 

At the end of 2005, in support of a Board and management review of our strategic priorities over the next three to five years, we took a number of steps to increase emphasis on longer-term performance. As a result, we made several changes in the compensation structure for key senior executives, including the named executive officers:

 

 

Merrill Lynch 2007 Proxy Statement 35  

 

 

The key objectives of our approach to executive compensation are outlined below:

 

We Pay for Performance.  Our annual incentive compensation programs emphasize the variable component of compensation and compensate executives and key employees based on individual, business unit and Company-wide performance measured against pre-determined objectives. We believe this approach drives profitability and competitive advantage for the Company and for our shareholders. In determining compensation for our executives, we consider Company performance both on an absolute basis and relative to our Peer Group. We emphasize variable pay as the core of our compensation policy to provide a strong incentive to increase financial performance and enhance returns to shareholders. In addition, our industry is highly sensitive to market conditions and this approach enables us to control costs when revenues decline in down markets and to increase variable pay when revenues are growing in expanding markets. We also strive to remain disciplined in our approach to compensation; although overall compensation expense tends to increase with revenue growth, we have been able to reduce our ratio of compensation expense to net revenues for the last four years even as we repositioned our businesses and took advantage of opportunities for growth.

 

Our Compensation Programs Support Retention and Alignment with Shareholders.  We pay a significant portion of variable annual incentive compensation in the form of annual restricted share grants that contain restrictive covenants and vest incrementally over a four-year period. The equity component of annual compensation helps us retain our executives because it is subject to forfeiture if an executive leaves the Company prior to vesting for any reason other than retirement. Consequently, because a large portion of each executive’s annual bonus is not paid in the year it is earned, the cost of leaving the Company can be significant to both the executive and the competition. By emphasizing the stock component of annual pay, we encourage key employees to establish long-term careers with Merrill Lynch, which helps us recruit our leaders from inside the Company. Their experience and long-term perspective benefit us as we grow our businesses and take measured risks in complex financial markets. Over time, their wealth is increasingly concentrated in Merrill Lynch stock, which intensifies their focus on the long-term performance of the Company and ensures alignment with our shareholders because a significant portion of their net worth will increase or decrease with the Company’s stock price. In addition, our stock retention guidelines require executive officers to retain 75% of the net after-tax value of their equity holdings on an annual basis, and executive officers are not permitted to hedge their exposure to Merrill Lynch stock.

 

We Offer Compensation Opportunities that are Competitive in Our Industry.  We offer compensation opportunities that are comparable to those of our competitors so that we can attract, retain and motivate the executive officers and key employees who are essential to our success. With this in mind, we remain informed about competitive pay levels and take them into account as we determine compensation within our pay-for-performance philosophy. Our information is based on independently prepared compensation survey results conducted by compensation consultants and publicly-reported information for executive officers and key employees with similar responsibilities and experience at Peer Group companies. We focus primarily on

 

 36 Merrill Lynch 2007 Proxy Statement

aggregated and reported compensation information from The Bear Stearns Companies Inc., Citigroup Inc., The Goldman Sachs Group, Inc., J.P. Morgan Chase & Co., Lehman Brothers Holdings Inc. and Morgan Stanley (collectively, the Peer Group). The MDCC also uses the financial performance of the Peer Group to measure our relative performance in making year-end compensation decisions. We have used this Peer Group for compensation and performance comparisons for a number of years, as we believe that these firms have profit margins in key businesses and a business mix most similar to our own and compete directly for the same talent pool globally. This Peer Group also serves as a proxy for our other non-traditional competitors - such as hedge funds and private equity funds - who also compete for this talent pool but do not make compensation information publicly available.

 

Annual Pay for Executive Officers.  The primary components of our annual pay to our executive officers are summarized in the following table.

 

 

Equity Portion of the Annual Bonus.  We pay a significant portion of annual incentive compensation for executive officers in the form of stock-based compensation. Under our current programs, 60% of combined salary and annual bonus for our executive officers is paid in equity. Restricted stock awards are delivered in lieu of cash bonus compensation and represent an integral part of the annual incentive compensation paid for performance in the prior fiscal year. As a result, restricted stock awards are not subject to further performance-based vesting requirements. These awards contain restrictive covenants against post-termination competition, use of confidential information and solicitation of employees and remain subject to forfeiture during the vesting period.

 

 

Merrill Lynch 2007 Proxy Statement 37  

 

 

Deferred Compensation.  We offer certain highly paid employees the ability to defer receipt of up to 90% of their annual cash incentive payments or commission compensation. We do not match deferred amounts. All of the executive officers listed in the Summary Compensation Table were eligible to defer compensation in 2006, although none of them elected to do so. We believe that this program is important to provide our senior employees with flexibility in meeting their future income needs. The deferred compensation program is described in more detail in the Non-Qualified Deferred Compensation Table and related narrative disclosure.

 

 38 Merrill Lynch 2007 Proxy Statement

Long-Term Performance-Based Awards - Managing Partner Incentive Program (MPP). The details of the MPP are described in more detail below.

 

 

Link to longer term financial results with increased focus on “firm-wide” performance.  At the beginning of 2006, we granted MP participation units (MP units) representing three years’ participation in the MPP. The specific goal for the first performance-based program under the MPP is to increase our annual return on equity (ROE) for our 2006, 2007 and 2008 fiscal years over ROE for 2005.

 

 

Merrill Lynch 2007 Proxy Statement 39  

 

 

Based on operating ROE performance in 2006, which exceeded 2005 ROE by 5.6 percentage points, the 2006 target level was exceeded and one-third of the MP units converted at the plan maximum ratio of 2.5 to 1 in January 2007. Within the partnership plan and concept, this performance resulted in the delivery of an equal award of 121,363 restricted shares to each of Mr. O’Neal, Mr. Kim, Mr. Fleming, Mr. Fakahany and Mr. McCann and 84,663 restricted shares to Mr. Edwards and other select members of senior management. All such restricted shares are subject to vesting requirements until January 2010, and their value at vesting will depend on our stock price at that time.

 

The Company’s future ROE performance is inherently uncertain and can be significantly affected by market conditions, tax rates, asset turnover and other factors. Assuming market conditions in 2007 and 2008 continue to be as favorable as those in 2006, and assuming the Company continues to successfully execute on its operating plan, it is likely that target ROE will be met or exceeded and possible that the plan will pay out at or near the maximum level in each year.

 

 

 40 Merrill Lynch 2007 Proxy Statement

 

Executive Officer Benefits.  We have summarized the benefits provided to the CEO and/or executive officers in the following table. These benefits are periodically reviewed with the MDCC.

 

 

Employment Agreements.  We do not have any employment agreements with our executive officers or any agreements to provide severance protection to any executive officer absent a change in control of the Company. Accordingly, if the CEO or any executive officer terminates his or her employment for any reason and there has not been a change in control of the Company, any severance payments or other benefits would be at the discretion of the MDCC.

 

Restrictive Covenant Agreements.  We have entered into Restrictive Covenant Agreements with all of our executive officers and select members of senior management. These agreements require six months notice to the Company prior to termination and limit the ability of executive officers to compete with us or to solicit or hire our employees if they leave the Company.

 

Change in Control Severance Agreements.  We have agreements with seven executive officers that provide for severance payments in certain circumstances after a change in control. Under these “double-trigger” agreements, we will be required to make severance payments if: (1) there is a change in control and (2) the executive officer is terminated other than for “cause” or resigns for “good reason.” In 2005, we re-examined the

 

Merrill Lynch 2007 Proxy Statement 41  

need for these agreements and eliminated them for 26 other members of our senior management. We continue to believe that, for our executive officers, these agreements provide desirable incentives for them to remain with us through any period of transition and uncertainty in connection with a change in control. Separately, under our equity plans, all participants, including our executive officers, will receive cash payments for their stock if, following a change in control, they are terminated other than for “cause” or resign for “good reason.” For a description of these agreements see “Potential Payments Upon Termination or Change in Control” in this Proxy Statement.

 

Tax, Accounting and Regulatory Factors

 

Adoption of FAS 123R.  In the first quarter of 2006, we adopted the provisions of the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, a revision of FAS No. 123 (FAS 123R). Previously, we had recognized expense for stock-based compensation over the vesting period stipulated in the grant for all employees, including those who had satisfied retirement eligibility criteria but remained subject to a restriction on competition that applied from the date of retirement through the end of each applicable vesting period. When we adopted FAS 123R, we were required to immediately recognize 100% of the expense related to grants of stock-based compensation for the 2005 performance year to retirement-eligible employees, including Mr. O’Neal, Mr. Edwards, Mr. Fakahany and Mr. McCann. In addition, we began accruing the expense of stock-based compensation for retirement-eligible employees over the 2006 performance year. In other words, in 2006, we accrued the expected value of stock-based compensation for stock grants to be made in January 2007 to retirement-eligible employees, including Mr. O’Neal, Mr. Edwards, Mr. Fakahany and Mr. McCann. We are not permitted, however, to accrue a similar expense for employees who are not retirement-eligible, including Mr. Kim and Mr. Fleming. Expense for stock grants to those employees is recognized over the vesting period.

 

The adoption of FAS 123R, combined with other business and competitive considerations, prompted us to undertake a comprehensive review of our stock-based incentive awards — including vesting schedules and retirement eligibility requirements — and their impact on the firm and its employees. Upon the completion of this review, the MDCC determined that, to increase retention of high quality personnel, future stock grants should contain more stringent age and length of service requirements for employees to be eligible to retire from Merrill Lynch while their stock grants continue to vest, subject to compliance with the strict non-compete provisions. To facilitate the transition to the more stringent future requirements, the terms of most outstanding stock awards previously granted to our employees, including Mr. Kim and Mr. Fleming, were modified, effective March 31, 2006, to permit them to be immediately eligible for retirement with respect to those earlier awards. Although we modified the retirement-related provisions of the previous stock awards, the vesting and non-compete provisions otherwise remain in force. We recorded one-time compensation expense in the first quarter of 2006 relating to this modification.

 

As required by transition guidance relating to FAS 123R, compensation expenses for stock grants made prior to 2006 to employees who had been retirement-eligible prior to 2006 continue to be recognized over the applicable vesting periods. All of the named executive officers were retirement-eligible with respect to some pre-2006 grants, so we recorded compensation expense with respect to a portion of such earlier grants in 2006.

 

Impact of Accounting Treatment on Disclosure of Stock-Based Compensation.  As a result of the adoption of FAS 123R and the modifications to retirement eligibility described above, the Summary Compensation Table includes the expense for multiple performance years. Under SEC rules adopted in December 2006, we are now required to include, in the “Stock Awards” and “Option Awards” columns of the Summary Compensation Table, all amounts recognized in our 2006 financial statements with respect to outstanding stock-based awards. These amounts are also included in the “Total” column in the Summary Compensation Table. For executive officers eligible for retirement under the terms of awards for the 2006 performance year, including Mr. O’Neal, Mr. Edwards, Mr. Fakahany and Mr. McCann, we recognized expense in 2006 for the following: (1) the full value of the stock award for the 2006 performance year; (2) the full value of the stock award granted for the 2005

 

 42 Merrill Lynch 2007 Proxy Statement

performance year; and (3) portions of awards for performance years prior to 2005. For Mr. Kim and Mr. Fleming, who are not career retirement eligible for awards for the 2006 performance year, we did not accrue any expense in 2006 for the awards for the 2006 performance year but recognized the full value of the award for the 2005 performance year and portions of awards for prior performance years. With the exception of amounts accrued for grants made for the 2006 performance year, all of these amounts already were disclosed as compensation for the relevant performance year in past proxy statements (for those executives required to be included in those proxy statements). See “Summary Compensation Table,” footnote 2, in this Proxy Statement.

 

Internal Revenue Code Section 162(m).  We try to maximize the amount of compensation that is deductible for tax purposes under Section 162(m) of the Internal Revenue Code and related regulations. We use a shareholder-approved formula to determine the maximum amount of cash bonuses and restricted stock that we are able to pay to any of our executives. Amounts paid under this formula qualify as deductible compensation expense under Internal Revenue Code Section 162(m). This formula imposes a limit of 1% of our pre-tax profit on amounts paid to each executive. Under the formula, the MDCC has “negative discretion” to pay amounts that are less than, but not more than, the formula amounts. Options are considered to be performance-based compensation under Section 162(m) and are not subject to the limit. Each year, the MDCC, after a presentation from the Chief Financial Officer, certifies that the compensation to be awarded for the prior fiscal year complies with the performance goal formula approved by shareholders. In practice, the formula operates as a cap on annual incentive compensation paid in cash or restricted stock, and the MDCC generally exercises negative discretion to pay amounts that are significantly lower than the formula amounts. The formula yielded a maximum of $104.2 million for 2006.

 

Determination of Annual Compensation

 

In accordance with its Board-approved charter, the MDCC developed its 2006 annual compensation determinations with two primary objectives in mind - to reward tangible results measured against pre-established performance objectives and to ensure that compensation for our executives is competitive within our industry. As described in “Corporate Governance - Board Committees - The Management Development and Compensation Committee - Setting Annual Performance Objectives” in this Proxy Statement, at the beginning of the year, management, in a dialogue with the MDCC, set a series of specified financial, strategic and leadership goals for the Company and individual business units. These objectives were shared with the full Board after formal approval by the MDCC. Over the course of the year, management provided the MDCC with regular updates on the progress of performance against these objectives.

 

At meetings in December 2006 and January 2007, the MDCC reviewed the 2006 results for the Company, compared those results with reported results in the Peer Group, and conducted a final review of CEO performance against financial and strategic objectives for 2006. Separately, the CEO provided the Committee with a detailed review of the performance of each Executive Vice President and the CFO and made a 2006 total compensation recommendation for each of them. Finally, the Committee considered information on Peer Group total compensation levels, developed by management and Towers Perrin from independent survey data and public filings. On the basis of this information, the MDCC made its 2006 annual pay decisions at a private session on January 10, 2007, as more fully described below.

 

Financial Review

 

The Committee evaluated preliminary final 2006 financial results on a GAAP and operating basis (excluding the one-time net gain arising from the closing of the merger between MLIM and BlackRock in the third quarter and the one-time non-cash compensation costs recorded in the first quarter related to the adoption of FAS 123R). The Committee focused in particular on growth in net revenues, after-tax earnings, earnings per share and ROE. The Committee noted that, on an operating basis, our ratio of compensation to Net Revenues declined by 1.6 percentage points year over year, so that earnings grew at a faster rate than our compensation pools (a

 

Merrill Lynch 2007 Proxy Statement 43  

26% increase in Net Revenues drove a 49% increase in Earnings Per Share (EPS)). The Committee also took note of the nearly 38% total shareholder return for the year.

 

The Committee also considered our results in light of Peer Group performance and concluded that our 2006 results placed us near the top of the Peer Group based on these measures. The Committee noted that the growth trajectory for Revenue, After-Tax Earnings, EPS and ROE trended sharply upward this year in comparison to most of the Peer Group, and that this improvement was impacted significantly by strong results in many of the key growth areas first identified by management in early 2004 and vigorously pursued over the past two years.

 

Performance Against Objectives

 

The Committee considered performance against the CEO objectives determined at the beginning of the year and noted that all financial targets were met or exceeded and all strategic and leadership objectives were met with distinction. This review included consideration of numerous objectives but focused in particular on the following achievements:

 

Financial Objectives

 

 

In its discussion of ROE performance, the MDCC focused on the importance of this measure, which had been identified as a high priority for the CEO and the members of executive management. They noted that the improvement had been driven substantially by the achievement of record earnings of $7.6 billion (on an operating basis), which represented a 48% increase over the previous year’s record. The Committee also noted that these record results reflected solid execution around several specific growth imperatives outlined to the Board over the past three years.

 

Strategic Objectives

 

 

 44 Merrill Lynch 2007 Proxy Statement

 

Leadership Objectives

 

 

Executive Officer Review

 

As mentioned above, the CEO reviewed with Committee members the achievements of the individual members of executive management. For the heads of individual business units such as GMI and GWM, this review focused on the relative contribution of each of those business units to our overall 2006 results that are discussed above. The review also detailed each executive’s contribution to Company-wide performance and the leadership of the Company detailed above, as well as each executive’s individual leadership achievements. In determining compensation for the Executive Vice Presidents and the CFO, the Committee evaluated the CEO’s recommendations and differentiated compensation amounts based on contributions of each individual, his or her role in the organization, the contribution of his or her business unit or area, and competitive pay data discussed below.

 

Use of Competitive Data

 

The MDCC then reviewed 2005 actual and 2006 projected total compensation amounts for Chief Executive Officers and other members of executive management in the Peer Group for comparison purposes and to refine its analysis. The Committee uses this information as one reference point to ensure that compensation opportunities are comparable with those in the Peer Group.

 

2006 Compensation Determinations

 

Following consideration in private session of the factors mentioned above, the Committee determined 2006 compensation for the CEO, the CFO and the four other most highly compensated executive officers as specified in the 2006 Annual Executive Compensation table set forth below. In each case, the annual incentive compensation was separated into cash and stock components so that the stock portion would represent 60% of total annual compensation (before deduction of the individual MPP contributions). The stock portion of each executive’s annual incentive compensation was delivered 100% in restricted stock except that the specified amount of the stock bonus amount was retained by the Company as the executive’s individual contribution to the partial funding of his three-year participation in the MPP, payment of which, as described earlier, is contingent on ROE performance in 2006, 2007 and 2008.

 

The number of restricted shares granted as the stock portion of annual incentive compensation was related directly to the dollar value of the award and was converted based on a market valuation with no discount. The number of restricted shares granted was calculated by dividing the dollar amount of the award by $95.825, the fair market value (the average of the high and low) of a share of Merrill Lynch common stock on January 22, 2007, the grant date.

 

Merrill Lynch 2007 Proxy Statement 45  

Summary

 

The following table sets forth the annual compensation approved by the MDCC for performance in fiscal year 2006, based on the methodology described above.

 

2006 ANNUAL EXECUTIVE COMPENSATION

 

 

 

 

The stock grant amounts shown above represent the dollar value of the portion of 2006 annual incentive compensation delivered as restricted stock. These amounts are different from the amounts included in the Summary Compensation Table under “Stock Awards,” which are calculated as required by the SEC disclosure rules and represent expense related to awards for multiple performance years (including the expense for the full fair value of awards for two performance years for Mr. O’Neal, Mr. Edwards, Mr. Fakahany and Mr. McCann). See the disclosure in “Tax, Accounting and Regulatory Factors” and the “Summary Compensation Table,” footnote 2, in this Proxy Statement for more information.

 

 46 Merrill Lynch 2007 Proxy Statement

SUMMARY COMPENSATION TABLE

 

 

 

 

 

		Stock Award Grant Year
Name		2003 (a)				2004 (b)				2005 (b)				2006 (b)				2007 (c)				Total
Mr. O’Neal		$	1,201,451			$	2,777,728			$	7,853,251			$	28,147,621			$	26,800,049			$	66,780,100
Mr. Edwards			408,337				660,116				960,691				11,761,969				8,183,359				21,974,472
Mr. Kim			691,032				1,686,468				2,759,926				19,446,757				-				24,584,183
Mr. Fleming			353,374				1,190,446				2,132,671				15,849,700				-				19,526,191
Mr. Fakahany			588,951				1,091,245				1,881,778				18,628,870				16,000,092				38,190,936
Mr. McCann			-				1,190,446				1,881,778				16,844,051				11,800,082				31,716,357

 

 

(a)		The amount for Mr. O’Neal was reflected in full in our 2003 proxy statement under the “Restricted Securities” column in the Summary Compensation Table. The other executives were not required to be included in the Summary Compensation Table in that year.
(b)		For all executives other than Mr. Edwards, (i) amounts relating to restricted stock awards were reflected in full in our 2004, 2005 and 2006 proxy statements, respectively, under the “Restricted Securities” column in the Summary Compensation Table, and (ii) MP Units granted at the beginning of 2006 were described in the 2006 proxy statement. Mr. Edwards’ compensation was not required to be disclosed in the Summary Compensation Table in those years. Mr. O’Neal’s annual incentive bonus paid in 2005 for 2004 performance was delivered entirely in restricted stock.

 

(c)		Our 2006 consolidated financial statements include accrued expense for the estimated value of 2007 stock awards to all retirement-eligible employees for 2006 performance. For purposes of these tables, we have included the FAS 123R grant date fair value of the actual grants awarded to retirement-eligible named executive officers.

 

Merrill Lynch 2007 Proxy Statement 47  

 

 

		Stock Option Grant Year
Name		2001 (a)				2003 (b)				2004 (b)				Total
Mr. O’Neal		$	1,787,893			$	580,309			$	702,329			$	3,070,531
Mr. Edwards			-				197,225				169,352				366,577
Mr. Kim			-				333,767				426,415				760,182
Mr. Fleming			-				170,683				300,998				471,682
Mr. Fakahany			-				284,464				275,914				560,378
Mr. McCann			-				212,400				300,998				513,398

 

 

 

 

 

 48 Merrill Lynch 2007 Proxy Statement

 

 

 

Merrill Lynch 2007 Proxy Statement 49  

and annual contributions to our broad-based defined contribution retirement plan in 2006 were: (i) $11,000 for each of Messrs. O’Neal, Edwards and Fakahany; (ii) $8,800 for each of Messrs. Kim and Fleming; and (iii) $13,200 for Mr. McCann.

 

GRANTS OF PLAN-BASED AWARDS

 

 

 

 

 50 Merrill Lynch 2007 Proxy Statement

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END