“Compensation continues to generate controversy and anger,” Lloyd Blankfein, the chief executive of Goldman Sachs, said last month. “And, in many respects, much of it is understandable and appropriate.”
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On Thursday, Mr. Blankfein and his colleagues will likely be subject to some of that anger when Goldman reports its third-quarter results — and discloses the latest tally of just how much its employees will probably take home for their work this year. By most analyst estimates, the annual bonus pool will swell to more than $23 billion. In its second quarter, Goldman disclosed it had put aside $11.4 billion for the first half of the year.
“The absolute size of compensation payouts will rise significantly,” Keith Horowitz, an analyst at Citigroup, wrote in a note to clients two weeks ago.
To put that $23 billion bonus pool number in perspective, it is the most Goldman Sachs has accumulated for bonuses in its history — twice as much as in 2008. And it is doing so while memories are still fresh that just a year ago taxpayers had to step in when Wall Street, and even Goldman, were facing a run on the bank.
So should we be upset about the bonuses? Is this a problem? Viscerally, it can be infuriating to watch Goldman executives gobble up piles of money, especially when the government — an overused euphemism for taxpayers — had helped support the firm. It hasn’t been forgotten that the government gave Goldman $10 billion in bailout cash — which it has since returned and said it never needed. And don’t forget the cheap financing it now gets as a bank holding company.
But we can’t have it both ways, either. At one moment, many in the nation crossed their fingers hoping Goldman and the rest of Wall Street would be saved to halt the country’s downward spiral. But when the banks finally get up on their feet, we want them to fall flat again. Mr. Blankfein can’t win.
Now there’s talk inside Goldman that it is considering making a huge charitable donation — perhaps more than $1 billion — as a way to help deflect the criticism. Such a donation would be a welcome gesture that would no doubt benefit many needy organizations. But it would most likely be seen for what it is: a one-time move to draw attention away from where most of the money is really going. A large charitable donation also raises questions about the company’s fiduciary duty to its shareholders; it could be seen as giving away profits that ostensibly belong to them.
The bigger question — the more important question — is whether the enormous sums of money that will be given to Goldman’s executives are proper and whether the executives have the right incentives.
On this score — putting the large amount to the side for a moment — it is actually hard to argue with Goldman’s compensation scheme. Goldman’s executives are paid mostly in stock, which vests over three years starting at the end of the next year, so it is more like a four-year period. Excluding the eye-popping bonus numbers, no Goldman Sachs executive made more than $225,000 in cash last year. Mr. Blankfein and the rest of his management team, in deference to popular opinion at the time, waived their compensation completely.
So even though many of Goldman’s executives may make tens of millions of dollars, it is only on paper so far. And Goldman may impose a clawback provision that would require employees to give up some of their compensation if trades go the wrong way, similar to ones that Morgan Stanley and several others have already proposed. That’s the good news.
The bad news is the absolute number. It is far greater than any other bonus figure on Wall Street. Goldman says that its compensation program is based on pay for performance, and it is hard to argue that it has not performed well.
The company also says that it needs to pay these large sums to retain its best people or risk losing them to rivals. That may be true for a small percentage of its most senior executives, but some experts suggest it is a disingenuous argument.
“It’s hard to explain this as a defensive effort to keep their employees from being raided,” said Lucian Bebchuk, a professor of law, economics and finance at Harvard Law School. “The outside opportunities for their people are less attractive in 2009 and 2010 than they were in 2007.”
Indeed, it is possible that Goldman’s bonus largess is creating a vicious circle: other, perhaps lesser firms, are probably going to pay even higher bonuses to try to compete with Goldman.
And therein lies the rub: While Goldman may have the Midas touch, the rest of Wall Street never seems to be able to keep up. And the only way for rival firms to compete with Goldman is take to outsize risk.
And, well, we’re familiar with how that story goes.
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