When journalists, pundits and Main Street complain about the ever expanding size of Goldman Sachs' bonuses, the criticisms roll like water off the squid's back. But the Wall Street Journal is reporting that some Goldman shareholders are latest to cry foul. And unlike pretty much everybody else, their opinion actually matters. I think this is kind of fascinating.
Why are shareholders mad? Because if less money went to Goldman's bankers, more could go to investors. The Journal explains:
One frustration: Despite record net income and compensation at Goldman as markets rebound and the firm outmuscles weakened rivals for business, analysts expect its 2009 earnings per share to be 22% lower than in 2007 and roughly equal to its 2006 earnings, according to Thomson Financial.
If I were an investor that would likely annoy me too. After all, Goldman Sachs is a corporation, so it should be rewarding its investors in proportion to its success.
The WSJ says that Goldman's somewhat sneaky use of temporary employees and consultants to make their per employee bonuses appear smaller than they actually are also has shareholders fuming:
The figure is a lightning rod for criticism of Goldman because its staff is on pace to earn about $717,000 apiece for 2009. Excluding temporary employees and consultants would increase compensation per employee to about $775,000.
For decades Goldman and its Wall Street brethren have been arguing that enormous bonus pools are necessary to retain the best talent. I don't think shareholders are necessarily disagreeing with that maxim here. Instead, they're more concerned with getting those bonus sizes out of the stratosphere, even if only a little closer to earth, so that shareholders can be rewarded in better proportion. Besides, if Goldman's per employee bonus number was reduced a bit, the rest of the Street still wouldn't be able to compete with it's comp numbers, so I highly doubt its talent would have any greener pastures to flee to anyway.
This development is also notable because it marks the first time I've heard of that it isn't the angry masses with pitchforks complaining about Goldman's bonuses -- it's their own shareholders, many of whom are a lot closer to the Wall Street crowd than the Main Street crowd.
There would be a couple nice consequences for Goldman listening to its shareholders on this one. First, it would boost their share value, making their equity more attractive. And don't forget: Goldman pays a fair chunk of its bonuses in shares, so that would actually benefit its employees too. Second, obviously its shareholders would be happier, which is an end most corporations strive for. Finally, it might help to calm the angry mobs.
I think this issue is particularly interesting in the case of Goldman, because it was one of the last major investment banks to convert from a partnership to a corporation. While that should mark a major change in corporate culture, this incident makes it appear that its management still isn't used to putting shareholders first. If its bankers really have no intention of appeasing shareholders, then one option might be to convert back to a partnership -- then its employees would be entitled to every cent of its earnings. Of course, getting there wouldn't be easy, but it's really their only way out of ignoring the shareholders' voice.
Good stuff. Also, Goldman has what I think most would agree is a bit of a PR problem these days, moreso than it may usually have in less "turbulent" times. Methinks small concessions may go along way, at least relatively speaking, at least to show that they're listening to other stakeholders.
About the partnership thing, I had this conversation back when the stock was
Bonuses based on one year performance are robbery.
Exec compensation and bonuses should be besed on (at least) FIVE YEAR compensation.
One year bonuses prompt execs and traders to sacrifice the future of the company, and stockholders money, for immediate goals and bonuses. If the company tanks they still walk away with their huge bonuses.
A bonus/compensation plan based on a companies five year performance would force these robber-barons to have a longer term point of view. This would be beneficial to stockholders, ALL company employees and the public in the long run.
Before you start b*tching you should probably get a clue. Above the analyst level bonuses are awarded more and more (as one moves up in the firm) in restricted stock, and less in cash. These stock awards often have 3, 5, + year vesting periods, encouraging higher-ranking employees to act in the firm's best interest.
If one positive thing were to come out of the Great Recession (and it is far from clear that anything will), it would be a resurgence shareholder interest.
Goldman and the other investment banks only became public within the last few decades. By doing so, they grabbed enormous capital reserves that let them keep upping the ante in their risky game, and that's all well and good. But for too long, they and especially their counterparts have been ignoring any shareholder input in actual decisions.
It's time that we as Americans started remembering that "capitalism" is a system designed to favor the investor, not the executive. An executive is merely a highly positioned employee; the shareholders are the capitalists, and they should have the ability to vote out the entire board at once on a simple majority basis (the way that they can in other countries) rather than being sidelined by celebrity CEOs.
Let's put this bonus situation into perspective.
2009 Bonus Pool at Goldman Sachs $17,000,000,000
Number of $50K salaries you could pay with this for a year 340,000 people
Number of people GS laid off last year and then replaced 3,000+
How much GS layoffs are sucking from the government in unemployment for the people they laid off and didn't call back $52,000,000 year
How much GS layoffs are sucking from the government in COBRA stimulus for the people they laid off and replaced within six months (didn't call back) $12,000,000 year
Just a little kicker here. Number of people who could get $250 a month for a year for health insurance for a year with the GS Bonus Pool 5,666,667
The point is, $17 billion is a LOT of money and there is NO talent that is worth that. The only talent they are exhibiting is a talent to steal and con. Goldman laid off 10 percent of its workforce right before they accepted the bailout money. Many of those employees were long-term, well-respected, employees who never had a work issue. Primarily they were support staff -- hence expendable. As soon as GS paid back the bailout money they started rehiring for the positions they eliminated -- never even called their loyal workers back. Now the government is not only paying unemployment benefits to employees Goldman kicked to the curb as part of their plan to get bailout money, they are now sticking the government with the costs of these people's unemployment benefits and extended COBRA benefits. With $17 billion in bonuses, they could rehire these people, create more jobs and business, not to mention setting a good example and creating good will, and could eliminate a small portion of the unemployment mess in this country -- but at least move things forward in a positive direction.
As silly as this comparison will seem to some people, it is no less silly and preposterous than giving out $17 billion in bonuses while at the same time laying off employees, and while the country is suffering with so much umemployment and financial distress. Like I said, I can't believe I am quoting Spiderman, but he said ... "With great power comes great responsiblity." Blankein -- get some freaking Spidey Sense.
It is about time that someone who has some authority began to question the practices of bonuses on Wall Street. As a registered nurse I have been repeatedly told that nurses motivation to work is not driven by the amount of compensation, but by a multitude of factors including having a work environment that is safe, where the nurse can work with a degree of autonomy and where resources are adequate to provide quality patient care. Why it is that similar principles do not seem to apply to those working in the financial sector. This argument that obscene compensation is required to attract and retain talent is nonsensical.
No employee including the CEO is worth the salaries and bonuses which are being paid at Goldman. When the executives are allowed to set their own compensation, it is no wonder that this tired and empty argument is used in an attempt to justify their behavior. Maybe it is time to impose malpractice liability on all these individuals in the same way we hold health care professionals responsible for their practices. Clearly what is good for the goose on Wall Street is not even a consideration for the gander on Main Street if you are a Goldman executive.
I think it's about time someone did something about the fact that nurses in the US make more than 2x as much as nurses in Europe, the UK or Japan. When so many are going without health care how can nurses demand to be paid so much more than those in any other country?
It's a scandal.
Daniel Indiviglio makes some good points about the need for Goldman to rethink its culture.
Sadly, their credibility is undermined by sloppy writing and an astonishing lack of basic editing at a magazine that I've long admired for its high standards.
In the very first sentence, we read "pundant" for pundit and later on we read "maximum" for maxim. These aren't just typos; they're a sign that this magazine really isn't run by literate people.
They’re typos, now corrected. When writing a several thousand words per week, sometimes a few are unavoidable. Still, I apologize for missing them in the re-reads.