Goldman Sachs changes bonus practices

Wall Street investment bank Goldman Sachs last Thursday announced changes to the incentive compensation practices for 2009 for its top 30 managers, paying bonuses entirely in stock which is locked up for five years and tightening clawback provisions.

The bank's 30-person management committee, which includes all of the global divisional and regional heads, will be paid 100% of their bonus in shares. Hong Kong-based Michael Evans, who is vice-chairman of the firm and responsible for Asia, will be among those covered by the new guidelines. Evans was recently named by FinanceAsia as a member of The Club, our inaugural list of 50 masters of Asian finance. Tokyo-based Masanori Mochida, co-president of Goldman Sachs in Japan, is the other management committee member in Asia, who will fall under the purview of the change.

The shares being allotted to the management committee members are subject to a five-year lockup. They are also subject to clawback, meaning Goldman can take back the shares if the employee has "engaged in materially improper risk analysis or failed sufficiently to raise concerns about risks".

Goldman already has a clawback provision which covers "fraud or malfeasance by employees, including conduct detrimental to the firm or which results in a material restatement of the financial statements or material financial harm to the firm or one of its business units". The investment bank last week further tightened clawback provisions to ensure that employees take ownership over the future fallout from decisions they make and the bank emphasised that its compensation policies do not reward employees who take "excessive risk". In April, rival US investment bank Morgan Stanley also tightened its clawback provisions, as part of a host of changes to its bonus policies.

"The measures that we are announcing today reflect the compensation principles that we articulated at our shareholders' meeting in May," Lloyd Blankfein, chairman and chief executive officer of Goldman Sachs, said in a written statement on Thursday announcing the revised bonus practices. "We believe our compensation policies are the strongest in our industry and ensure that compensation accurately reflects the firm's performance and incentivises behaviour that is in the public's and our shareholders' best interests."

Effective compensation practices include linking compensation to multi-year performance, aligning it with the long-term interests of the firm and its shareholders, and ensuring that compensation incentives are formulated so that they serve as a tool to attract, retain and motivate talent, without encouraging excessive risk-taking, Goldman said.

At its third-quarter earnings call in October, posted on seekingalpha, Goldman Sachs chief financial officer David Viniar told analysts the firm had set aside $5.4 billion during the quarter, or 43.3% of net revenues, for compensation and benefits, including salaries, discretionary compensation, amortisation of equity payouts in previous years, severance costs and other items. The 43.3% set aside in the quarter was down from 47% of net revenues accrued year-to-date in 2009.

Paying senior management in stock that is locked up is beneficial for the firm as it reduces the chance of any of these key managers jumping ship. The cost involved for any firm that tries to poach a senior Goldman executive will include "making whole" the stock which is vested and which the employee will forego, making this a very costly proposition. Goldman's 30 top managers have been with the investment bank for an average of 19 years.

In October Credit Suisse announced revised compensation practices, which will become effective January 1 next year and will also apply to 2009 bonuses. Credit Suisse changed the mix of bonus and salary payable to managing directors and directors, such that fixed salaries will be a larger component of the overall payout for employees at these senior levels. The Swiss bank also introduced minimum share ownership requirements for members of management committees and for the executive board.

Goldman's shareholders will be allowed an advisory vote on the US investment bank's compensation principles and the compensation of specified executive officers at the firm's annual shareholders' meeting in 2010. Goldman Sachs had 31,700 employees at the end of the third quarter. Its move to restructure the bonuses of its top 30 executives, who represent 0.1% of overall staff, is welcome, but it remains to be seen whether it is enough to quell the growing dismay that bonus payouts have fast reverted to past practices and that the financial crisis of 2008 is all but forgotten.