Goldman CEO: Clawback Compensation

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.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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