The Advisors' Blog

– Broc Romanek, CompensationStandards.com

As Mark Borges blogged, Goldman Sachs announced last Thursday that its board had decided to implement a say-on-pay advisory vote starting next year (the first U.S. banking institution to so so) and eliminate cash bonuses fro the top 30 executives (and use clawbacks on the shares given as bonuses, which must be held five years).

This announcement was made before yesterday’s stern warning from President Obama to the banking industry’s fat cats, some of whom couldn’t attend the meeting due to fog. This skeptical skit is pretty funny.

Below are some thoughts on Goldman’s pay plan from RiskMetrics’ Ted Allen:

After negotiations with investors, Goldman Sachs Group has agreed to hold an annual advisory vote on executive compensation in 2010 and adopt bonus-deferral provisions.

Under the new policies announced Dec. 10, the financial company’s 30-person management committee will receive all of their discretionary compensation in the form of “shares at risk” that may not be sold for five years. Those shares would be an “enhanced” clawback policy in the event that “an employee engaged in materially improper risk analysis or failed sufficiently to raise concerns about risks.” In a press release, the company said the new policy “is intended to ensure that our employees are accountable for the future impact of their decisions, to reinforce the importance of risk controls to the firm and to make clear that our compensation practices do not reward taking excessive risk.”

“The measures that we are announcing today reflect the compensation principles that we articulated at our shareholders’ meeting in May. We believe our compensation policies are the strongest in our industry and ensure that compensation accurately reflects the firm’s performance and incentivizes behavior that is in the public’s and our shareholders’ best interests,” CEO Lloyd C. Blankfein said in the press release. “In addition, by subjecting our compensation principles and executive compensation to a shareholder advisory vote, we are further strengthening our dialogue with shareholders on the important issue of compensation.”

In response to Goldman’s decision, Walden Asset Management and Connecticut’s state pension fund plan to withdraw the “say on pay” proposal they filed for the company’s 2010 meeting. In 2008, a Walden-Connecticut advisory vote proposal received 45.5 percent support at Goldman.

“As Congress considers whether to require all public companies to have an annual shareholder advisory vote on executive compensation, Goldman Sachs’ action today is a tremendous step that demonstrates its support of this important corporate governance reform,” Connecticut State Treasurer Denise Nappier said in a Dec. 10 press release.

The Goldman press release did not specify the frequency of the advisory vote after 2010. That issue may become moot; proponents expect that Congress will pass legislation soon that would require marketwide annual votes starting in 2011.

Goldman received 97.9 percent support for its pay practices this past May when it held an advisory vote that was required for all companies participating in the U.S. government’s Troubled Asset Relief Program (TARP). After exiting TARP, Goldman was criticized by investors over its plan to pay more than $20 billion in year-end bonuses. A coalition of religious investors filed a pay disparity proposal at the firm in October.

Goldman is the first U.S.-based banking company to agree to hold an advisory vote, and the firm appears to be the first to adopt a bonus-deferral policy. Swiss banks UBS and Credit Suisse previously adopted deferral provisions, and French bankers agreed in late August to do so. In late September, Britain’s five largest financial firms endorsed the Group of 20’s principles on compensation, which call for deferring at least 40 percent of variable pay and a deferral period of at least three years.

In addition to Goldman Sachs, at least 31 U.S. firms have agreed to conduct voluntary shareholder votes on compensation, according to RiskMetrics Group data.