The Advisors' Blog

– Paul Hodgson, The Corporate Library

Here is something I recently wrote in “The Corporate Library” Blog:

CEO of Goldman Sachs Lloyd Blankfein’s remarks at the Handelsblatt Banking Conference recently were reported by a number of commentators. Breaking Views, for one, indicated that they were worth repeating.

Well, only if they have been changed, and it’s hard to tell precisely whether they have. Focusing yet again on compensation in the latter part of the speech he said: “There is little justification for the payment of outsized discretionary compensation when a financial institution lost money for the year.” But isn’t that exactly what Goldman did in 2008? Net income of $2.3 billion and bonuses of $4.8 billion, according to Andrew Cuomo’s report that I wrote about earlier. Don’t those bonuses wipe out that net income? Well, not really, but it’s worth thinking about anyway.

Let’s have another look at those compensation principles. He reiterated them:

“In short, we believe:

– The percentage of compensation awarded in equity should increase significantly as an employee’s total compensation increases.
– For senior people, most of the compensation should be in deferred equity. Only the firm’s junior people should receive the majority of their compensation in cash.
– An individual’s performance should be evaluated over time so as to avoid excessive risk taking and allow for a “clawback” effect. To ensure this, all equity awards should be subject to future delivery and/or deferred exercise over at least a three-year period.
– No one should get compensated with reference to only his or her own P&L. Compensation should encourage real teamwork and discourage selfish behavior, including excessive risk taking, which hurts the longer term interests of the firm and its shareholders.
– To avoid misaligning compensation and performance, multi-year guaranteed employment contracts should be banned entirely. The use of these contracts, unfortunately, is a common practice in our industry. We should all recognize that they are bad for the long-term interests of our industry and the financial system.
– And, senior executive officers should be required to retain the bulk of the equity they receive until they retire. In addition, equity delivery schedules should continue to apply after the individual has left the firm.”

With almost all of this we have absolutely no quarrel at all. But the key here is: “An individual’s performance should be evaluated over time….”

According to the Wall Street Journal article on the same remarks, the Dutch have now understood along with the British, the Germans and the French as the article notes that the Netherlands Bankers’ Association has indicated that it expects banks to have long-term targets.

Now Mr. Blankfein betrayed a basic misunderstanding of multi-year performance periods earlier in the year when these principals were first announced. Measuring performance over the long-term does not mean measuring it over 12 months and paying it out over the long term, even if the amount is subject to clawback. It means measuring it over the long-term. So it’s hard to say whether he actually means it when he says “evaluated over time.” I guess we’ll have to wait until the next proxy season and Goldman’s new compensation discussion and analysis to find out.

Or he could just let us know now.