economic crisis

Overplaying Goldman’s Bonus Move

December 11, 2009

Goldman Sachs (an Audit funder) is making some baby steps on pay, but the press way overplays what is essentially a PR move.

The Wall Street Journal and The New York Times both slap the news on A1, with the WSJ headlining that “Goldman Blinks on Bonuses,” implying it’s backing down on pay, when it’s doing no such thing. The Times‘s hed is not much better: “Goldman’s Curbs on Bonuses Aim to Quell Uproar.” That implies that Goldman is curbing or cutting pay.

It’s doing no such thing. In fact, the move in all likelihood will increase the already-astronomical amount Goldman executives—and I do mean executives: these supposedly A1-worthy changes affect only the top thirty employees—will get this year. That’s because the big move, such that it is, is that Goldman is going to pay its top 30 people not in cash and stock, but in only stock—shares that they can’t cash in for five years.

This is a nice, positive move toward tying Goldman employees’ interests—like those of its partners of yore—to the long-term health of the firm. That theoretically means they wouldn’t be as tempted to blow up the world economy again in search of a quick buck (well, bucks. Many bucks. It’s always many bucks with Goldman) by, say, selling time-bomb securities they’re shorting at the same time.

But Goldman’s share price in five years will probably be higher than it is now. You wouldn’t bet against that, would you? I mean, even in the middle (or at the tale end, if we’re lucky) of the worst financial calamity in eighty years, Goldman’s five-year return is a nifty 52 percent. That’s in line with the 8 percent or so per year Wall Street tells retail investors to expect for equity investments.

So it’s a decent bet that, barring another financial implosion (which isn’t as unlikely as you think), Goldman’s stock will be up by at least 52 percent in 2014. That would mean if CEO Lloyd Blankfein gets $70 million in stock this year (this is set to be a record pay year, and he got $68.5 million in 2007), by the time he cashes it in, hopefully for him after the storm has blown over, it will be worth $106.4 million. Neat trick!

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Alas, only Louise Story of the Times is onto this, and up high, in the second paragraph:

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.

Now, of course there are real indirect costs to having your money tied up for five years in one investment. But let’s note that there’s real upside too. And it’s also important to emphasize that the stock-only move is a one-year-only thing, something the Journal puts up high.

The other Goldman moves are a clawback provision and a shareholder vote on pay. But if you think Goldman execs are going to be living in fear of a clawback, you’re unaware of how little those things have ever actually been used. And the shareholder vote, which everyone plays up, is non-binding. In other words: It doesn’t matter, except for PR purposes.

The Los Angeles Times does the best job of the major papers of really emphasizing that this move is mostly for show:

But Goldman stopped short of the most dramatic step that critics have called for — actually reducing compensation — leaving outsiders to ask whether the latest move was little more than window dressing to tamp down the appearance of unbridled greed.

“This is as much a PR move as it is a move to change their pay structure,” said Dan Pedrotty, the AFL-CIO’s director of investments and a critic of corporate pay practices. “You still have this bottom-line issue that a firm that was just recently bailed out by the American taxpayer is paying out enormous sums of money.”

Yes, but don’t tell this guy quoted in the Washington Post:

“You got to give Goldman credit for getting in front of it,” said Robert A. Profusek, a partner at the law firm Jones Day who deals with executive compensation. “I just hope people don’t conclude that what’s good for Goldman is good for everyone else. ”

Bloomberg also does a pretty good job. (ADDING: And I missed this Bloomberg piece, which is also good.)

This story got big play in the big papers. Let’s hope those form 4 SEC filings coming out detailing the millions and tens of millions these guys get will be a bigger story.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.