Goldman’s Curbs on Bonuses Aim to Quell Uproar

Goldman’s Curbs on Bonuses Aim to Quell Uproar
By LOUISE STORY
Copyright by The New York Times
Published: December 10, 2009
http://www.nytimes.com/2009/12/11/business/11pay.html?hpw


With France joining Britain in proposing a steep tax on bank bonuses, Goldman Sachs moved on Thursday to quell the uproar over its resurgent profits and pay.

Bowing to calls for restraint in tough economic times, Goldman said that its most senior executives would forgo cash bonuses this year. Instead, the 30 executives will be paid in the form of long-term stock — an arrangement that means they will not get big year-end paydays, but one that could turn out to be enormously lucrative if Goldman’s share price rises over time.

The move is meant to address concerns that bankers and traders in the past benefited from short-term performance. The shift at Goldman locks up the executives’ rewards for five years and enables Goldman to claw back the bonuses in the event the bank’s business sours.

Goldman did not say how much it would pay the executives, suggesting the bank would continue a practice — widely followed in investment banking — of allocating roughly half its annual revenue for compensation. While their bonuses will be paid in long-term stock, the payouts are likely to be worth many millions of dollars.

It is uncertain if the move, which applies only to a small number of Goldman employees, will be enough to placate critics of Wall Street, including some policy makers in Washington, where Kenneth R. Feinberg, the special master of compensation, will release new pay rulings on Friday.

“We’re starting to see some firms adopt compensation structures and policies that are in the direction of the principles that the president and Feinberg have been articulating, but we have a long way to go,” said Neal Wolin, deputy secretary of the Treasury.

A year after the government rescued the financial system with billions of taxpayer dollars, banks are preparing to pay out annual bonuses that could rival those of the bubble years. Nowhere is the bonanza expected to be bigger than at Goldman Sachs, which so far this year has set aside a record $16.7 billion to pay its workers, or roughly $700,000 per employee.

With even once-beleaguered giants like Bank of America now extricating themselves from the federal bailout program, Mr. Feinberg, who has advocated for banks to pay bonuses entirely in stock, is losing much of his power. Mr. Feinberg is expected to announce on Friday that he will cap the pay of a cohort of workers at the six companies still under his purview at $500,000 and require that half their pay be deferred for three years, according to a person familiar with the matter.

Most big banks, however, are now free to pay their employees as they see fit, now that they have repaid their bailout funds. To Wall Street critics and, indeed, many ordinary Americans, the prospect of a new era of Wall Street wealth, so soon after the financial collapse, and with so many people out of work, seems shocking. Some see the coming round of bonuses as evidence that policy makers failed to reform pay practices that in, some cases, fostered the risky businesses that lead to the financial crisis in the first place.

“There’s a universal discomfort with the levels of compensation we’re seeing in the financial system,” said Jonathan Koppell, a professor of public policy at the Yale School of Management. “The idea that private institutions should be walled out from government intervention is harder to swallow when in the last year government intervention was quite welcome in the form of billions of dollars in bailouts.”

Many on Wall Street were waiting anxiously to see what Goldman would do. Goldman is enjoying one of the most profitable years in its 140-year history, and its rapid recovery has made the bank a lightning rod.

Much of the resentment has been directed at Goldman’s chief executive, Lloyd C. Blankfein, who after first staunchly defending the bank’s profits and pay, and then bristling at calls for restraint, apologized for mistakes that led to the financial crisis.

Mr. Blankfein declined a bonus last year. In 2007, he was paid about $67.5 million, a Wall Street record. This year, he and 29 other top executives will receive bonuses that could be quite large, but they will be in the form of what Goldman called “shares at risk,” or stock that cannot be sold for five years and can be retracted if the executive does something that hurts the firm. Goldman has long paid a portion of bonuses in stock.

Goldman also announced on Thursday that, for the first time, it would give its shareholders a say in determining compensation. The vote would be nonbinding, however.

The shift atop Goldman will not prevent Goldman employees in France and Britain from falling subject to a one-time windfall tax in those countries. After the British chancellor of the Exchequer proposed such a tax earlier this week, French finance minister, Christine Lagarde, threw her support behind a similar tax on Thursday and, in an interview, she said she hoped that other countries would follow suit. The German chancellor, Angela Merkel, described the tax as an “attractive idea” in a speech in Bonn, Germany.

Mr. Feinberg’s domain, meantime, is shrinking rapidly. Bank of America paid back its bailout money on Wednesday and only its top 25 workers whose pay Mr. Feinberg ruled on in October will be subject to his mandates this year. In recent days, Citigroup, too, has been trying to cut its lifeline to Washington in part to protect its workers from Mr. Feinberg’s rulings on Friday.

“Ken Feinberg has had more of an impact of driving people out of the bailout than on compensation,” said Joseph A. Grundfest, a professor at Stanford Law School. “His job in large part is like trying to nail Jell-O to the wall.”

If Citigroup returns the bailout funds, only the American International Group, the Detroit automakers and their related finance companies would be subject to Mr. Feinberg’s rules. And at Chrysler and General Motors, few workers earn more than $500,000 in any case. Rose Marie Orens, a senior partner, at Compensation Advisory Partners in New York, said the resentment directed at Wall Street was unlikely to let up as long as the economy remains weak.

The outcry, she said, “has reached a crescendo as it related to the financial crisis, and we’re not out of that. We are still highly sensitized to the role the organizations played and to the role that compensation played.”

Jenny Anderson, Stephen Castle, Katrin Bennhold and Steven Erlanger contributed reporting.