Investing

Goldman: A Fresh Eye on Bonuses


By Erik Schatzker and Michael J. Moore

(Bloomberg)—Goldman Sachs (GS), the most profitable firm in Wall Street history, is taking a "very hard look" at whether to pay people less because of public outrage over bonuses, board member William George said.

Goldman Sachs set aside 47 percent of revenue for compensation and benefits through the third quarter, enough to pay each employee more than $500,000 for nine month's work. George, a professor at Harvard Business School who sits on the New York-based bank's compensation committee, said the board may lower the percentage this year and in the future.

"I think that's up to the compensation committee to decide, but I think they are going to take a very hard look at it," George said in an interview today on Bloomberg Television. "There is so much anger out there and I'm not quite sure how to ameliorate that, other than to moderate things and to recognize that Goldman and every other firm benefited from the actions of the Federal Reserve Board and the Treasury Department."

Goldman Sachs's pay policies came under scrutiny by lawmakers and regulators after the firm received $10 billion from the Troubled Asset Relief Program and issued debt guaranteed by the Federal Deposit Insurance Corp. to help it weather the financial crisis. The firm repaid the $10 billon with interest in June.

'Irresponsibly High' Treasury Secretary Timothy Geithner last week disputed claims by Goldman Sachs executives that the firm could have survived without help from the government and called for an end to "irresponsibly high bonuses" on Wall Street. Goldman Sachs Chief Executive Officer Lloyd Blankfein favors a "pay for performance" culture, and a posting on the firm's Web site says that approach "incentivizes employees to create long-term value for shareholders."

George, who was CEO of Medtronic Inc. (MDT), the medical-devices maker, from 1991 to 2001, said Goldman Sachs "isn't tuning it out" when criticisms are made about compensation.

"There will clearly be bonuses paid this year, but I think one has to look at it in relation to the profits," said George, who joined Goldman Sachs's board in 2002. "Wall Street historically has paid out a high percentage of its pre- compensation profits, but I think that's being closely looked at right now."

In 2007, when Goldman paid employees a record $20.1 billion, the firm set aside 43.9 percent of revenue for compensation and benefits. Last year, the so-called comp ratio rose to 48 percent. The percentage typically drops in the fourth quarter.

Compensation Ratios Goldman Sachs's chief financial officer, David Viniar, told analysts on a conference call in March 2008 that "compensation is two-thirds of our expenses and year-end bonuses are two- thirds of our compensation."

George, 67, said Goldman can't handle pay the way non- financial companies such as Medtronic do because of competition from private-equity firms and hedge funds.

The answer, he said, is to tie compensation to long-term performance. The practice of paying out large cash bonuses "has got to move on," he said, adding that incentive payments should be made in restricted stock with a vesting period, or maturity, of five years or more.

"It's clearly a sensitive matter, and I think the amount is a sensitive matter," he said. "I don't think at any level the public can feel satisfied with it."

To contact the reporters on this story: Michael J. Moore in New York at mmoore55@bloomberg.net; Erik Schatzker in New York at eschatzker@bloomberg.net

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