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Goldman Sachs Restricts Bonuses

12.11.09

Goldman Sachs announced yesterday that they will be changing the way that their top 30 executives receive their discretionary compensation (read: their bonuses).

New York Times:

Goldman said that all 30 members of its executive committee, which encompasses top managers across its businesses, will receive their discretionary compensation in the form of shares at risk, a form of restricted stock that cannot be sold for five years and includes a clawback option in case their businesses falter down the road.

I went to look up “discretionary compensation” online but could not find a solid definition, so I ended up asking a colleague who confirmed that it was a technical term for a bonus.  This colleague, after learning of the context of my inquiry, said that this type of restriction will force the “best and brightest” out of that field and our economy will get even worse as a result.  I’m sure this colleague is not alone in that line of thinking, but I can’t help but think that this is actually a good thing.

(The whole notion of bonuses seems a bit bizarre to me: when everyone gets a bonus, doesn’t it stop being a merit-based reward and ends up simply being part of a salary?  Also, if you still get a bonus even when the company isn’t doing well, how is that right?)

But, I get it: the company is doing well, so the top brass get rewarded for a job well done.  Fair enough.  Those smart brains stay at the company, company flourishes, everyone benefits with a steady, secure job.  But, as we all know from last year’s financial meltdown, clearly this model doesn’t always work perfectly.  This new policy at Goldman Sachs gives the shareholders, and ultimately, American taxpayers, some insurance. (Despite Goldman saying that they didn’t need the bailout, they did, and they took the aid, which has definitely been a huge factor in them recording huge profits already this year.)

The problem lies in what happened over the past several years.  Financial institutions were announcing record profits – Goldman CEO Lloyd Blankfein scored a “$53.4 million bonus in 2007” – and then everything went under and look at where we are now.  If companies are making tons of money based on extraordinarily risky ventures or fabricated derivatives, like what got us into the whole financial crisis in the first place, then these profits are short-term and really only end up benefiting the executives who score massive bonuses while the company excels and then have no real accountability when everything tanks afterward.  Those in charge of such decisions should be held financially accountable to their shareholders.

Maybe now they’ll think twice before gambling with millions of other people’s dollars.

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