Goldman Sachs Addresses Shareholder Concerns over Executive Pay

By December 17, 2009News

Goldman Sachs (Goldman) is no stranger to investor uproar about how much it pays its employees, especially senior managers. The billions in the bonus pool and the tens of millions paid to the reigning CEO are headline news when they are made public.

Recently, however, Goldman announced changes in its pay practices that may placate some of its longtime critics.

First, the top 30 earners will receive all of their incentive (or variable) compensation in company shares which cannot be sold for five years. This is quite a change from the typical Goldman practice of awarding bonuses 70% in stock and 30% in cash, with the non-cash portion vesting over four years.

In addition, the bonus shares can be clawed back by the company during the holding period if their holder is found to have “engaged in materially improper risk analysis or failed sufficiently to raise concerns about risks”.

The company noted that these risk-based clawback triggers extend the current policy, which applies to “employee acts of fraud or malfeasance and any conduct that is detrimental to the firm, including conduct resulting in a material restatement of the financial statements or material financial harm to the firm or one of its business units”.

Goldman also announced that it will put an advisory vote on executive compensation, or ‘say on pay’, on the ballot for its 2010 annual general meeting (AGM) of shareholders. At the 2009 AGM, 46% of all votes were cast for a shareholder proposal asking for a pay vote. For its part, Goldman had vehemently opposed instituting a say on pay prior to its December 10 about-face.

The changes in compensation outlined above will not address the concerns of all Goldman shareholders. In October 2009, the Nathan Cummings Foundation and the Benedictine Sisters of Mt. Angel, Oregon, announced that they had filed a proposal on compensation for a vote at Goldman’s 2010 AGM. The proposal asks the compensation committee of the company’s board to compare its senior executive pay with median wages in the United States in July of 2000, 2004 and 2009, analyze the relative size of the gap at each time and “justify” it. Clearly, changes to the delivery system for bonuses to Goldman’s employees do little to address the concerns raised by these shareholders about the Main Street/Wall Street pay gap.

Full details of the proposal filed by Nathan Cummings Foundation and the Benedictine Sisters of Mt. Angel, Oregon can be found in a press release issued on October 14 by the Interfaith Center on Corporate Responsibility.

On a decidedly more confrontational note, the Security Police and Fire Professionals of America Retirement Fund (the SPFPA Fund) is suing Goldman over how it pays its employees. According to the law firm acting for the SPFPA Fund, the central allegation in the complaint is that Goldman’s pay practices constitute a breach by the directors of their fiduciary duty to act in the best interests of the company and its shareholders. Specifically, it points to Goldman’s long-standing practice of allocating about half of its net revenue to compensation, without considering the extent to which employee performance is actually responsible for generating those funds.

By Laura O’Neill, Director of Law and Policy