Tuesday, Goldman Sachs Group Inc.'s (GS) chairman and chief executive Lloyd Blankfein called for certain basic standards with regard to compensation in the industry, a hot topic among politicians, public and the investors alike in the light of the financial crisis. He felt that compensation should include an annual salary plus discretionary deferred compensation and that the percentage of compensation awarded in equity should increase significantly as an employee's total compensation increases.
Blankfein recommends that all equity awards be subject to future delivery and/or deferred exercise over at least a three-year period and senior people should get most of their compensation in deferred equity, while junior employees should receive the majority of their compensation in cash. Additionally, he said senior executive officers need to retain the bulk of the equity they receive until they retire and equity delivery schedules should continue to apply even after the individual leaves the company.
Many financial institutions are accused of indulging in high executive compensation, even as the company itself is struggling for survival. Several recipients of the government's rescue packages are reported to have transferred a major portion of that into executives' hands, and are under legal scrutiny. Recently, the bonuses paid to Merrill Lynch executives just before its merger with Bank of America Corp. (BAC) and those paid by insurer American International Group Inc. (AIG) to appease certain employees of its Financial Products unit had invited public wrath.
Delivering a speech to the Council of Institutional Investors' spring meeting in Washington, Blankfein said pay should reflect an individual's ability to identify and create value, while enhancing the company's reputation and contributing to the better functioning and efficiency of markets.
We recognize that having TARP money creates an important context for compensation. That is why, in part, our executive management team elected not to receive a bonus in 2008, even though the firm produced a substantial profit. Beyond TARP, public scrutiny, a renewal of common sense and, perhaps, regulation will naturally affect compensation practices going forward, Blankfein noted.
Goldman Sachs received $10 billion in government rescue to remain in business. It was reported last month that the company is ready to repay the TARP money by the middle of April and was seeking the nod of the regulators for the same.
Blankfein felt that compensation should also consider conformation to the management and controls of the company, especially with regard to judgment in terms of risk that must be evaluated on a multi-year basis for a clearer picture of the outcomes.
It was reported last month that Blankfein received total compensation of $1.11 million in 2008, representing a 98.4% decline as compared to the $70.3 million he received in 2007.
According to Goldman Sachs' CEO, capital, credit and underwriting standards should be subject to more dynamic regulation. He felt that all pools of capital, including large hedge funds and private equity funds, should be subject to some degree of regulation. Regulators should implement more robust information sharing and harmonized disclosure, coupled with a more systemic, effective reporting regime for institutions and major market participants.
Another key point Blankfein suggested involves the sharing of performance. Noting that individual performance must not be viewed in isolation, he said the performance of the business unit and the overall firm needs to be considered in this regard.
Employees should share in the upside when overall performance is strong and they should all share in the downside when overall performance is weak. 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, he said. As an industry, we need to do a better job of understanding when incentives begin to work against the social good rather than for it and take action to redress the balance.
Dwelling on the economic crisis, he said, .the genesis of the problem wasn't in sub-prime. Instead, the roots of the damage to our financial system are broad and deep. They coalesced over many years to create a sustained period of cheap credit and excess liquidity.
Blankfein pointed out that there has been significant growth in the amount of foreign capital, and a shift in the balance of payments of many emerging markets. Additionally, low long-term interest rates prevailed for nearly ten years, coupled with the official U.S. policy of subsidizing homeownership, all contributing to the housing bubble.
Talking about fair value accounting, Blankfein said if more institutions had properly valued their positions and commitments in the beginning itself, they would have been in a much better position to reduce their exposures.
For Goldman Sachs, the daily marking of positions to current market prices was a key contributor to our decision to reduce risk relatively early in markets and in positions that were deteriorating. This process can be difficult, and sometimes painful, but I believe it is a discipline that should define financial institutions. We mark-to-market, not because we are required to, but because we wouldn't know how to assess or manage risk if market prices were not reflected on our books, he said.
Blankfein felt that companies were too dependent on rating agencies for risk management analysis. Referring to the curbs on hiring employees through the H-1B visa program, he also decried the protectionist and self-defeating actions that would have international implications.
Blankfein's speech was reportedly marked by protests from people who appeared on stage with placards stating they want their money back.
GS closed Tuesday's regular trade at $116.08, down $0.57 or 0.49%, on 22.19 million shares.
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