All Aboard the Goldman Sachs Bonus Train
By Michael Corkery
While the wreckage of the global financial system still smoldering, some reports say Goldman Sachs Group is planning to pay its employees sizable bonuses this year, possibly the biggest ever.
The U.K.’s Guardian newspaper reported last week that Goldman’s London staffers were told that the company expects to pay record bonuses in 2009.
In reality, it probably is too early to say whether this year will be a record year for bonuses. The first quarter was strong but no guarantee of what the rest of the year will look like.
Still, Goldman has been signaling to that it is likely to pay big bonuses this year. In letters to House and Senate leaders on June 16, Chief Executive Lloyd Blankfein made it clear that now that Goldman had paid back the $10 billion it had received from the Troubled Asset Relief Program, it would ensure that “compensation reflects the true performance of the firm and motivates proper behavior.”
Goldman may have the right kinds of justifications in this environment for big bonuses. Much of the company’s recent profit has come from its fixed-income business, a less-risky arena than the illiquid derivatives and others products it loaded up on amid the credit bubble and Goldman has reduced its overall leverage from a year ago. That seems to fit the less risky profile that Congress wants from financial firms.
Goldman also has been trying to bolster its case for bonuses by broadcasting a new set of “compensation principles” designed to limit excessive risk-taking by limiting employment guarantees and reducing the amount of cash employees are paid. Goldman plans to pay employees more stock and less cash the longer they stay at the company. It also wants to discourage taking risks for short-term profits–the kind of behavior blamed for contributing to the financial meltdown–and instead it is encouraging employees to think and act like long-term shareholders.
Goldman may be riding high for now with its low risk margins. But many of its competitors, like Lehman Brothers and Merrill Lynch, are gone. Goldman’s compensation guidelines will really be put to the test only when the economy and credit markets rebound and higher-risk, higher risk investments become tempting again.
By that time, the heat will be off Wall Street and the truly big Wall Street pay day will likely return again.
All Aboard the Goldman Sachs Bonus Train - Deal Journal - WSJ