The new Goldman way: Less cushy compensation?

September 19, 2012

By Lauren Tara LaCapra

On a conference call to discuss Goldman Sachs’ new chief financial officer yesterday, an analyst asked departing CFO David Viniar why he was leaving when the stock is at a historic low.

Viniar avoided the question by joking that his successor, Harvey Schwartz, would trump that performance. But some investors think they have a better way to fix Goldman’s stock slump: cut back further on comp.

Goldman has brought compensation costs down, in part, by firing, nudging into retirement, or happily accepting the resignation of people who make a whole lot of money. (Viniar, whose salary clocked in at $15.8 million last year, is among that group.) Overall, the bank reduced comp costs by $3.2 billion last year and has cut 3,400 staffers from its payroll since the end of 2010.

But some shareholders think Goldman should be doing even more.

One prominent investor who focuses on financial stocks said Goldman is facing “the Lazard problem” — a culture where employees expect to get paid a lot, and will leave if they don’t. But, he says, management is not seeing things the same way as shareholders because they have fared much better financially, even in bad times.

To illustrate this gap, he compared return-on-equity for common shareholders against compensation as portion of common equity. (For ROE, he divided pretax earnings by common shareholder equity and for the compensation measure, he adjusted pay for estimated tax costs and divided that by common shareholder equity.)

According to his calculations, Goldman employees have done better than shareholders by 10 percentage points, on average,  since the firm went public in 1999. That equates to $34.7 billion over those 12 years, he said, not including what Goldman spends to repurchase shares issued to employees.

To put that figure in perspective, Goldman’s current market cap is about $57.5 billion.

In good times, when everyone was profiting from a rising market, this issue seemed to matter less. But now that Goldman  is trading just shy of tangible book value — a measure of what the company would be worth if liquidated — investors have become less forgiving.

Goldman declined to comment about the matter, but executives there have argued that if they cut pay dramatically, the most talented people will leave. And it’s worth noting that Goldman, like all big banks, has changed some aspects of its pay practices because of new regulations. Employees get more pay in stock, with restrictions on selling shares and clawback if things go awry. Goldman shareholders have also voted against measures that would further strengthen compensation policies, suggesting their views on pay align with management’s.

Goldman is well aware of shareholder frustrations. The bank recently upped its dividend to appease investors, and lifted an annual cost-cutting goal to a $1.9 billion to sustain profits as dealmaking and trading activity remain stagnant.

Goldman paid employees $12.2 billion last year, down 21 percent from 2010. Compensation as a portion of revenue rose to 42 percent from 39 percent because of an even-sharper revenue decline, but average employee pay dropped 15 percent, to $367,057.

With ROE in the single-digits, some investors feel the bank should do more to align shareholder compensation with employees’.

“They’re trying to get to $1.9 billion” in cost-cutting, said one former Goldman executive who still owns plenty of stock. “That’s nice, but compared to what they pay people, it’s basically a rounding error.”

Goldman shares closed down 0.7 percent at $119.02 on Wednesday, less than the bank’s stated tangible book value of $126.12 as of June 30.

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