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Executive Compensation

Compensation Discussion and Analysis

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based tax-qualified plans) and will not be entitled to a change-in-control severance agreement or any non-broad-based perquisites, other than a car and driver, and will only be provided use of the Company aircraft for business purposes. Mr. Thain will be entitled to gross-up payments if he is subject to excise taxes in the event of a change in control of Merrill Lynch.

On December 3, 2007, Merrill Lynch announced that Mr. Chai who, prior to joining Merrill Lynch, was CFO of NYSE Euronext had been appointed Executive Vice President and CFO of Merrill Lynch effective December 10, 2007. Merrill Lynch entered into an agreement with Mr. Chai that covered the terms on which he would join Merrill Lynch. The terms of the agreement cover: (i) base salary; (ii) a bonus for fiscal year 2007 in recognition that Mr. Chai would not receive a bonus from NYSE Euronext for 2007 and as incentive to join Merrill Lynch; (iii) Merrill Lynch stock options and restricted shares to replace forfeited NYSE Euronext equity awards with the same present value and the same vesting, exercise and other terms as the forfeited awards; and (iv) sign-on restricted stock and stock options. It was agreed that Mr. Chai's sign-on bonus would be paid at the end of January and delivered 50% in cash and 50% in restricted units so that it would be consistent with our normal annual bonus practices.

The agreements with Mr. Thain and Mr. Chai do not provide for specified terms of employment or for any guaranteed bonus payments for future years. In accordance with our normal annual bonus practices, future bonus compensation for Mr. Thain and Mr. Chai will be determined annually by the MDCC. Mr. Thain and Mr. Chai also signed standard Merrill Lynch covenant agreements, which provide for a six-month notice period prior to termination of employment and limitations on hiring or soliciting employees or competing with Merrill Lynch post termination as described in the "Restrictive Covenant Agreements" section in this Proxy Statement. For additional details on Mr. Thain's and Mr. Chai's compensation, see "Summary Compensation Table" and "Grants of Plan-Based Awards" table in this Proxy Statement.

III. Determination of 2007 Compensation for Continuing Executive Officers

In accordance with its Board-approved charter, the MDCC developed its 2007 compensation determinations with two primary objectives in mind: (i) to pay appropriately for the Company's 2007 performance; and (ii) to retain key talent who would be important to the Company's future performance. 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, sets 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 provides the MDCC with regular updates on the progress of performance against these objectives.

Merrill Lynch reported a full-year 2007 net loss from continuing operations of $8.6 billion, or $10.73 per diluted share. The Company's substantially reduced performance was primarily driven by significant declines in its Fixed Income, Currencies and Commodities (FICC) net revenues for the second half of the year, which more than offset record full-year net revenues in Equity Markets and Investment Banking (IBK) (within Global Markets and Investment Banking (GMI)) and Global Wealth Management (GWM), and record first-half net revenues in FICC. Strong performances in most of the Company's businesses were overwhelmed by more than $20 billion of write-downs and credit valuation adjustments relating to U.S. ABS CDOs and U.S. sub-prime residential mortgages and related securities. At meetings in December 2007 and January 2008, the MDCC reviewed the 2007 results. During these meetings, the MDCC determined that while many of the Company's businesses had performed well, the financial performance of the Company as a whole had to be the dominant consideration in formulating its compensation determinations. The MDCC reviewed its conclusions with Mr. Thain who concurred.

The MDCC made its 2007 annual compensation decisions at a private session on January 28, 2008. The MDCC determined that, because of the Company's overall financial performance, no cash or stock incentive compensation would be paid to continuing executive officers for performance in 2007. The MDCC noted that members of executive management who remain with the Company had performed well against many of their objectives, managed the Company through the challenges of the second half of 2007 and guided it through a critical transition to new leadership. However, the MDCC concluded that the dramatic impact of the Company's overall financial performance outweighed these positive considerations for the year.

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