Goldman’s new bonus plan captures seasonal spirit

December 24, 2010

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Goldman Sachs’ new bonus scheme should give shareholders and regulators cause for a little celebration this Christmas.

The Wall Street firm is to link top bankers’ compensation to a wide range of financial measures, in a formal break with the industry tradition of crudely paying out a slice of revenues.

Goldman will also be able to claw back bonuses if it is caught up in another financial meltdown. And where Goldman goes, others tend to follow.

The new scheme, outlined in a Securities and Exchange Commission filing on Dec. 23, won’t appease bank bashers who think bonuses are just too big, or wrong in principle.

Goldman may have set aside 21 percent less for pay in the first nine months of 2010 than in the same period last year, but payouts for many dealmakers and traders are still likely to be astronomical.

It’s not clear whether the new philosophy of bonuses will inform the upcoming bonus round. There is also uncertainty over who count as the “key employees” covered, although this is likely to mean most managing directors, according to a person familiar with the situation.But it does seem that the changes mark a slight shift in the balance of power between staff and shareholders.

Goldman’s use of multiple profitability metrics should enable bonuses to reflect risk-adjusted performance more accurately than straight revenue generation. The hope must be that this latitude is used responsibly — and not to justify continual bumper payouts on the best formula for the moment.

The moves may also make investment banking less of a “heads I win, tails you lose” bet for staff. In 2008, many firms paid out huge bonuses despite being close to collapse, leaving shareholders — and governments — to pick up the tab. The new plan provides leeway for bonus promises to be broken in times of financial stress. By setting this out in writing, the bank can withhold payouts with less risk of being sued.

Goldman has taken a number of measures to restore its public image since it was hit by SEC fraud charges earlier this year. Its Business Standards Committee, which has been examining thorny issues such as conflicts and transparency, is due to report early next year. The latest bonus plan is another useful step.

Like many Goldman initiatives, it may well find it is followed by others on Wall Street.

(Editing by Chris Hughes and David Evans)

2 comments

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Employee compensation for Goldman and other banks should be limited to 10% of revenues. Any money beyond that should be returned to investors for a change.

Posted by breezinthru | Report as abusive

Maybe the shareholders and regulators will find cause for celebration in this new approach, but it is an approach that should have been in effect all along.

I’ll celebrate when total employee compensation and benefits is restricted to 10% of revenues. That would be quite a cut.

Posted by breezinthru | Report as abusive

[…] Goldman made the announcement, perhaps in an effort to garner some holiday cheer from investors and regulators, there was some talk that linking bonuses to the bank’s […]

Posted by Bonus Blues at Credit Suisse | TraderDaily | Report as abusive