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December 17, 2009
Will Goldman’s New Bonus Policy Continue to Encourage Short-Termism?
    by Robert Kropp

Harrington Investments files a shareowner resolution that would require executives to retain shares awarded as bonuses until after retirement.


When Goldman Sachs responded to the uproar over the TARP recipient’s apparent plans to award over $20 billion in bonuses to its employees this year, by announc ing that its 30-member Management Committee will receive equity Shares at Risk instead of cash as “discretionary compensation,” many were quick to applaud its decision.

The firm’s revised bonus payment plan was packaged with an announcement that it would allow shareowners to vote on executive compensation in 2010. Because Goldman Sachs became the first major US bank to voluntarily permit such a vote, its announcement was greeted with approval by the socially responsible investment (SRI) community.

But it hasn’t taken long for perceptive shareowner advocates to look under the hood of Goldman Sachs’ announcement. John Harrington, President and CEO of Harrington Investments, did so, and found several areas of Goldman’s new compensation policy to be problematic.

For one thing, Goldman’s policy change is to be in effect for one year only. Furthermore, the new policy addresses the discretionary compensation of only the management committee, clearing the way for the company’s traders to receive cash bonuses of $800,000 this year.

Harrington said, “There is a complete disconnect between the salaries and bonuses paid to top executives and traders at Goldman and the economic reality of millions of working Americans. These are the very people that have pushed US economic security to the brink.”

Harrington found problematic aspects in the awarding of Shares at Risk to Management Committee members as well. In a shareowner resolution that addresses executive compensation at Goldman Sachs, Harrington Investments addressed the nature of the clawbacks included in Goldman’s policy. According to Goldman Sachs, the provision would allow the firm “to recapture the shares in cases where the employee engaged in materially improper risk analysis or failed sufficiently to raise concerns about risks."

Harrington said, “With all of these clawbacks, the company may face a steep burden of proof to recover bonuses.”

Furthermore, Goldman’s policy would prevent recipients of Shares at Risk to sell those shares for only five years.

According to Harrington, “Our proposal would at least require the top management to hold on to their stock positions after retirement, adding an incentive to create a more long-term outlook for the company and benefit shareholders. In the absence of a requirement to hold on to the shares after retirement, the executives will have continued incentives to manipulate short-term profits once their ability to sell bonus shares ripens.”

 

 
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