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Goldman Sachs CEO Lloyd Blankfein

Nixing Bonuses, Goldman Sachs Sets the Bar for Wall Street

November 17, 2008 05:40 PM
by Josh Katz
Goldman Sachs made a statement Sunday when it announced that its top executives will not earn bonuses this year. Is Wall Street’s lavish compensation party over?

Goldman Sachs Execs Opt Out of Bonuses, Set Standard

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Goldman Sachs made a statement on executive pay on Sunday when it announced that its top seven officials would pass on their 2008 bonuses. Chief Executive Lloyd Blankfein, Presidents and Co-Chief Operating Officers Jon Winkelried and Gary Cohn, Chief Financial Officer David Viniar, and three vice chairmen supposedly asked the board’s compensation committee not to award them the bonuses, and the board agreed, Reuters reports. Goldman is one of the banks that has accepted federal money from the bailout, and must agree to standards set by the U.S. government.

Goldman set records last year for Wall Street compensation. Blankfein earned $68.5 million, Winkelried and Cohn took home $67.5 million and Viniar received $57.5 million. This year, however, the world financial crisis has taken its toll, with banks throughout the world laying off more than 150,000 people since the beginning of the credit crunch. Goldman recently cut 10 percent of its employees worldwide, accounting for 3,2000 people.

The Goldman executives will instead receive only their base salaries of $600,000. Bonuses usually make up about two-thirds of a Wall Street firm’s yearly pay, according to Bloomberg.

N.Y. Attorney General Andrew Cuomo requested last month that banks release information about their compensation. He called Goldman’s decision to pass on executive bonuses a “step in the right direction,” Bloomberg reports. Cuomo also said that other firms should do the same, particularly American International Group Inc. and Citigroup Inc., which today announced that it would lay off 50,000 employees: “It would send exactly the wrong message for Citigroup’s top brass to collect bonuses while investors, taxpayers and now Citigroup’s own employees suffer.”

Internationally, other banks had opted to forego executive bonuses before Goldman said it would. In October, Deutsche Bank AG, the largest bank in Germany, said that CEO Josef Ackermann and investment banking heads Anshu Jain and Michael Cohrs would not obtain bonuses.

On Monday, UBS followed in Goldman’s footsteps and declared that chairman Peter Kurer and its entire executive board would not get bonuses this year. The bank also said it would revamp its compensation model, according to Forbes.

The new system of compensation would be “focused on the long-term” and “closely aligned with the value creation of the firm,” UBS claimed. Instead of relying on annual performance to decide bonuses, compensation will be based on a three-year period. Forbes writes that, “The bank’s new compensation system is unique for now, but other banks around the world are likely to adopt similar plans.”

The Goldman announcement also comes about two months after Berkshire Hathaway CEO Warren Buffett opted to purchase $5 billion in preferred stock from Goldman Sachs at the end of September. To many, the move revealed Buffett’s confidence in the bank as companies like Lehman were falling by the wayside. According to the stipulations of the deal, “Goldman’s four top executives had to agree not to sell more than 10 percent of their company shares for three years, or until Buffett’s investment is redeemed.”

Opinion & Analysis: The implications of Goldman’s decision

Goldman Sachs has certainly set the bar for the banking world, John Gapper of the Financial Times says. “Given that Goldman has performed better than any other big investment bank—and than many smaller ones—during the financial crisis, it would be perverse for others to try to force open the door that has been slammed by Mr. Blankfein. Indeed, UBS has already fallen in line with Goldman.” But for next year, he believes, “most banks will attempt, in some form or other, to return to tradition in bonus-giving.”

Jeffrey Goldfarb of Breakingviews.com expresses a similar point by saying, “the heads-I-win-tails-you-lose bonus structure looks more anachronistic than ever.” U.S. banks are simply catching up to the culture espoused by the Europeans, he claims. But, “it’s one thing for a bank that calls Germany or Switzerland home to cave into social democratic salary envy, and quite another for an institution with an embedded partnership mentality in lower Manhattan to do the same.”

But Heidi N. Moore of The Wall Street Journal Deal Journal Blog contends that shedding executive bonuses won’t solve all of Goldman Sachs’ problems. According to Moore, “while symbolically welcome, it won’t solve the one thing shareholders want most: a return to profitability.”

The Goldman pay cut doesn’t satisfy Alan Stewart Carl of the blog Donklephant, either. “My question is, why were these executives ever slated to receive bonuses? I mean, Goldman Sachs shares have lost 70% of their value and the company had to go begging to the U.S. government for a bailout. Maybe I used to work at the wrong companies but, back in my corporate days, a bad year meant no bonuses. For anyone,” he writes. “Don’t worry about how Blankfein will get by without his yearly bonus. Last year he pulled in a $68 million bonus.”

Whatever the implications are for Goldman’s decision, the bank definitely made “big news” with its statement and “provides important spin lessons for any business facing an inevitable decision,” writes Paul Pendergrass of The New York Times DealBook Blog. “By being the first big financial firm to announce such restraint, Goldman reaped the benefit of being positioned as a leader in the majority of news reports,” and “By ceremonially sacrificing the top seven, Goldman can now operate with more flexibility as it rewards employees No. 8 through No. 30,000.”

Related Topic: University presidents’ pay

The Chronicle of Higher Education released the results of a report on Monday indicating that 89 presidents of colleges earned more than $500,000 in annual compensation, and a dozen collected more than $1 million, for the 2006-07 year. Five years earlier, only about half took home that much money, the Chicago Tribune reports.

“One thing colleges have to be worried about is this perception that you have a lot of presidents making big dollars when students and their parents are really worried about making tuition payments,” Jeffrey Selingo, editor of the Chronicle. The presidents of Rutgers University and the University of Connecticut turned down their bonuses this year.
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