Perverse cash incentives will make risk-taking more attractive and more risk-taking is not what the financial system needs.
Analysis: Goldman's top brass gun for cash bonusesRead the whole article here
By Jed Horowitz - Chicago Tribune Business
(Reuters) - While Wall Street slashes pay and freezes cash awards, Goldman Sachs Group's top five executives may reap special bonuses of $10.5 million apiece if the firm hits historically easy profit targets over the next two years.
Many companies have long-term incentive plans, but Goldman's program is notable for dangling hefty cash payouts at a time when banks are tilting toward deferred-stock awards.
Post-bailout anger at Goldman was still strong when the cash bonus plan was introduced a year ago, but the Occupy Wall Street movement had not yet made income inequality a hot-button political issue.
The program is now also playing out against stark internal conditions. Wall Street firms -- including Goldman -- are laying off thousands of employees, capping cash portions of bonuses and requiring repayment of past bonuses if profits prove to be fleeting, illegal or the result of excessive risk-taking.
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In its proxy statement last April, Goldman couched the new cash-bonus plan as, in part, a peace offering for executives. They received little or no bonuses in 2008, 2009 and 2010, the compensation committee wrote, despite "outperforming" core competitors such as Bank of America, Citigroup, JPMorgan Chase and Morgan Stanley.
The plan provides Blankfein, President Gary Cohn, Chief Financial Officer David Viniar and vice chairmen Michael Evans and John Weinberg an initial $7 million each. They'll collect if Goldman's return on equity averages 10 percent in 2011, 2012 and 2013 and its book value per share rises an average of 7 percent. The grant is adjusted at the end of every year, based on an adjusted ROE, with bonuses awarded in January 2014.
At a maximum, they can pocket 150 percent of the grant --$10.5 million if it stays at $7 million -- if ROE averages 15 percent or more and book value jumps at least 12 percent. On the low end, they'll collect half the grant as long as ROE hits 5 percent and book value rises 2 percent over the three years. Each metric comprises half of the award, but anything under the bottom targets yields no bonus.
The quintet participating in the plan at its initiation do not have to be employed at Goldman to collect, according to the company's 2011 proxy. That clause could create shareholder questions given rumors that Blankfein, 57, may be considering an early retirement.
By historical standards, critics say, the compensation committee set marshmallow targets. Goldman's ROE averaged 19.3 percent from its initial public offering in 1999 through 2010, and its book value compounded annually at 18 percent.
"The disclosed metrics appear designed to drive substantial rewards for historically average performance," ISS Proxy Advisory Services wrote in an April report that counseled shareholders to vote against ratifying the compensation of Goldman's executives. About 27 percent of shares were voted against the plan, more than any other proposal supported by the company.
Goldman's 2011 proxy statement insists that executives won't collect "if our firm generates low or negative returns." That appears to bode ill given that last year the bank had a dismal ROE of 3.7 percent -- the lowest since its 1999 initial public offering -- and book value per share that inched up only 1 percent.
The compensation committee, however, gave itself wide discretion to make adjustments. For example, it deducted $5.7 billion paid last year to redeem preferred stock held by Warren Buffett's Berkshire Hathaway from the ROE calculation. That lifts ROE to 5.9 percent, sufficient to qualify over three years for a payout.