Page after page has been written about Merrill Lynch (MER), the $8 bln loss and the failure of risk managers at not just Merrill but many top U.S. financial institutions. The coverage has been extensive, in depth and for the most part informative, pointing out weak links and potential systemic risk arising from suspect lending standards and weak financial controls.

I would like to talk about a far more serious threat investors face, Executive Compensation. First, let me set the record straight. I am a Hedge Fund Manager, so by definition I am a capitalist. I am not seeking limits to how much company's pay management teams. There are no limits for baseball players and movie stars so why should there be for CEO’s? The answer, of course, is there shouldn’t be.

However, as a shareholder, management compensation and what is going on inside the board demands your attention. Some research suggests that more than 80% of the U.S.' largest companies have change of control and management severance packages. These packages don’t come cheap.

When Robert Nardelli was ousted as Chairman and Chief Executive of Home Depot (HD) he received over $200 mln in severance compensation. Now we find that Stan O’Neil, the controversial and soon to be ex-CEO of Merrill Lynch, would have received over $200 mln if there was a change of control at Mother Merrill. It isn’t the size of the rewards that I find concerning: It is the structure of the deals.

Compensation packages should reward performance, not failure. Does it really cost $200 mln just to get rid of someone? The concept of the golden parachute needs to be examined. These practices are designed to entrench management and, let’s not forget, the board of directors who approve these outrageous structures. The board works for you, the shareholder. Compensation should be designed to encourage performance and shareholder returns. Along with this, of course, is a system that enhances corporate governance.

When losses at Merrill started to take their toll it was only natural for Mr. O’Neil to seek alternatives. Reports suggest he approached Wachovia (WB) in an apparent bid to explore a merger. Now we find that if there was a change of control at Merrill Mr. O’Neil would receive north of $200 mln. With the company reeling from recent financial losses and the stock down significantly how do shareholders maintain confidence that management is working on their behalf?