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.
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.
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."
“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.”