Employee negligence

I often speak with employers who've suffered a loss at the hands of an employee who didn't do such a great job. The employers want to know what they can do, in addition to firing the employee. The advice is usually pretty simple. First, you can look at the contract, if there is a contract. Second, depending upon what the employee does for the company, the loss may be insured. Third, if the employee was either negligent or committed some sort of an intentional tort, then you could sue the employee, but that opens up a whole can of worms.

The biggest worm in the can is that the loss the employer suffered is always much bigger than the employee could possibly pay. After all, the non-unionized worker on the JapanCo assembly line in Tennessee who's screwing lugnuts onto a tire rim for ten bucks an hour couldn't possibly pay the damages award when the wheel flies off and a church bus flips over. The second biggest worm is that suing your employees as a regular practice makes it hard to get employees. The third biggest worm is that you don't want to announce to the world that you're really bad at choosing whom you hire.

This week's Employee of the Week is Stan O'Neal, the head of Merrill Lynch. Today's New York Times reports that he's looking at a $159 million payday if he steps down. (Unclear what happens if he's fired for cause.) The speculation is that he's about to be sacked, having just announced an $8.4 billion (that's billion with a "B") writedown for failed mortgage and credit investments. The Times writes, "One thing that he surely will hold onto, though, are the giant paychecks he has collected," and it recounts that over Stan's five-year stint (he moved up from CFO to COO in July 2001 while Merrill Lynch was suffering a bad year and the line of succession to then-chairman/CEO David Komansky was in flux), the "giant paychecks" to date total $160 million over five years.

And exactly how did Stan do over his five years at the helm of Merrill Lynch? Well, before the $8.4 billion debacle, it looked like he was doing great, and he was well-paid for his performance. Under his predecessors, earnings per diluted share for 1997 to 2000 inclusive (before the 2001 debacle) averaged $2.78, but under Stan, for 2002-2006 the average was $4.76, working up the ladder to an astounding $7.59 in 2006. But, if you recalculate by deducting the $8.4 billion from the 2002-2006 figures, then under Stan's leadership Merrill averaged only $2.94 per share, a scant 5.9% higher than the 97-00 period. And remember, those are absolute (not inflation adjusted) numbers, so in real terms Merrill did worse under Stan than it did under his predecessors. All of a sudden, therefore, the third-of-a-billion that Stan may have in the bank solely from his earnings starts to look like a pretty good place to start recouping Merrill's losses.

In the words of one talking head quoted in the Times (Frederick E. Rowe Jr., a money manager and president of Investors for Director Accountability), “I lay the blame at the foot of the board. . . . He was paid a tremendous amount of money to create a loss that is mind-boggling, and he obviously took risks that should never have been taken.”

Putting aside the question of how Merrill's D&O policy would affect a claim, I wonder whether the Merrill board is asking the same questions of its lawyers that my clients ask of me?

Posted by Craig Albert