The giant vampire squid speaks. In a financial conference in Germany today, Goldman Sachs CEO Lloyd Blankfein gave a speech (opens .pdf) addressing a number of sensitive issues. In it, he explained what regulation was appropriate for the financial industry and that compensation style should be changed for Wall Street -- even clawed back when appropriate. Some might find Blankfein's comments about bonuses surprising, especially since he's the head of Goldman Sachs. I think most of them aren't, if you read between the lines.
Let's start with the compensation discussion in this post, because that's gotten the most attention. I find that unfortunate, by the way, since some of the regulation analysis he provides is far more valuable. I'll tackle that later. In any case, he outlines a few principles regarding how he wishes Wall Street compensation to change. I will consider his major points:
Compensation mix should shift to include a greater percentage of stock, and even greater for more senior employees.
To my knowledge, the compensation mix is already generally weighted towards stocks, especially for more senior employees. So I'm not sure that this is much of a departure from current practice, especially since he gives a fuzzy qualitative measure of the mix.
Stock awards should sometimes require future delivery and/or be deferred for at least three years.
Sounds good to me, but also not that different from what happens now. Often, stock/options awarded take time to vest. So, bankers are used to not seeing all of their compensation immediately. The difference comes in the next point.
Performance should be evaluated over time and include a "clawback" option, where previously awarded stock is subject to being taken back if things go bad a few years down the road.
This is a big change, and the only clear departure from current practice that Blankfein suggests. It's also very controversial. I'm fascinated to see the Goldman CEO go out on a limb here. He's suggesting that, if things go bad, compensation can be taken back.
The way I read his statement, this style of clawbacks would only pertain to the stock deferred or not yet paid out in a new bonus scheme. So that might account for a few years of bonuses. It would probably not touch cash payments or awarded stock that employees are free to trade.
As a result, this sort of clawback seems to be mostly punitive and less practical. If you hoped that clawbacks could restore a bank's health, then think again. As I wrote about a month ago, even if you collected all of the bonuses paid out on Wall Street over the three years prior to the recession, you wouldn't have enough money to have paid for the bank bailout. So such clawbacks would be more about punishment and less about saving a failing financial institution due to bad banker behavior.
There should be no multi-year guaranteed compensation contracts.
Multi-year guarantees aren't unheard of, but they're mostly given to relatively high-level executives. You won't see any associates or vice-presidents getting multi-year bonuses -- they're generally reserved for managing directors or senior officers. I think that the supposed problem of multi-year bonuses is a bit media-driven. As a result, it's not too shocking that Blankfein is willing to give those up. Besides, Goldman is already the premier investment bank, so it probably needs multi-year bonuses less than any other.
He also clearly leaves the door open for single-year guaranteed bonuses, which is kind of vital for recruitment. If you can't promise an applicant better compensation than he or she is currently getting, then it's pretty hard to convince that person to jump ship.
Senior officers should retain "the bulk of" firm stock until retirement.
This, too, is a bit of a departure from usual practice. I would suggest, however, that many senior officers naturally retain a great deal of their stock until retirement already. That's why you probably heard about so many senior bankers losing millions of dollars when their banks' shares plummeted. I heard stories of a great deal of wealth lost by former Lehman and Bear Sterns employees during the crisis. Of course, bankers have probably learned their lesson, and may choose to hold less bank stock going forward. That is, unless their contract requires it as Blankfein suggests it should.
If all of these suggestions were actually implemented, how would that change Wall Street? I think it would undergo a bit of a cultural shift. It would be a little harder for bankers to live as lavish a lifestyle. An even greater portion of their wealth would be tied up in stock, much of it for years. For senior bankers, their wealth would act more as a pension, since they couldn't tap into much of it until retirement. They would also have to spend more conservatively, with the fear that some of their wealth could be clawed back.
What is noticeably absent from Blankfein's speech, however, was any suggestion that Wall Street compensation should be curbed. He isn't saying bankers should be paid less, just differently. There are also some tricks banks can use to get around these constraints. For example, they could adopt very large dividend payments on their stock, essentially providing cash payments to all those forced to hold the stock. So while these suggestions are generally sensible, I wouldn't expect any major change on Wall Street if adopted.