Saturday, February 6, 2010

$9 Million Paycut?

Excerpts and [Commentary]

[In a masterful stroke of public relations, the Wall Street banker barons have skillfully orchestrated what appears to be a humbling pay cut in response to public outrage. News was first "leaked" that Goldman Sachs CEO Lloyd Blankfein was about to receive $100 million in bonus. After public outrage became exhausted, we are told that CEO Blankfein "took a bullet" for the gang, and received ONLY $9 million in stock. Media reports naturally repeat the words on Wall Street (the people who are being paid tens of million) that $9 million is a pittance, not worthy of the great and mighty CEO who is "doing God's work."

Perhaps a little perspective is in order. According to the Economic Policy Institute, the average CEO pay in 2005 (during the height of the bubble excess) was almost $11 million ($10,982,000). This include all compensation (cash, stocks etc) and was 262 times the average pay for a full-time hourly worker, at $41,861. In other words, counting only work days (365 minus weekends and holidays) the average CEO makes in one work day as much as the average hourly full-time worker in one year.

Mr. Blankfein, in addition to the $9 million in stock, also received $600,000 in cash, and other executive benefits, such as a company car and driver, as well as use of the private company jet, and other numerous benefits.

If Wall Street is trying to convince Main Street that they have learned a lesson and is humbled, perhaps they will follow the example of Citigroup CEO Vikram Pandit, and accept only $1 for compensation. Mr. Pandit is not alone in this magnificent gesture; many other great business leaders have done the same, from Apple's Steven Jobs, Chrysler's Lee Iacocca during the bailout in 1979, Edward M. Liddy during AIG's crisis. Compared to them, Mr. Blankfein's $9 million in bonus, and $600,000 in cash, plus additional benefits seem like a princely sum.

NEW YORK (Reuters) - In a sign it is concerned about Main Street anger over bankers' compensation, Goldman Sachs Group Inc decided to give its CEO Lloyd Blankfein and other top executives lower bonuses than many had expected.

Goldman, which reported a record profit for 2009, will pay the executives bonuses in stock worth $9 million each, far below what they got in the previous record profit year of 2007. Blankfein received $67.9 million for that year.

The bonus, which was less than the roughly $16 million that rival bank JPMorgan CEO Jamie Dimon was rewarded with earlier in the day, was far below the $100 million that at least one British newspaper had predicted.

[A masterful public relations ploy! Compared to $67.9 million and $16 million, Mr. Blankfein is indeed being treated poorly. The year 2007 was also the year when the Credit Default Swap was in full swing, intoxicating the entire international financial market with its "weapon of mass destruction" as Warren Buffet described it. Perhaps we should return to those good days, too.]

The decision follows months of criticism of Goldman, partly because of expectations that its soaring profits would lead to massive bonuses just over a year after it was aided by the government through bailout funds and other financial support.

Blankfein's bonus is such that he will not even be among the highest paid people at Goldman, the firm he has run since 2006. Star traders and bankers within Goldman's ranks will almost certainly be receiving more.

"He is going to have a lot of people two levels below him who are making more than he does," said Alan Johnson, a Wall Street Compensation consultant.

[The problem is the pay scale on Wall Street is out of touch with reality. Comparing Mr. Blankfein's bonus to other exorbitant bonuses is like children telling parents that other kids have them, too.]

Blankfein's bonus is an increase from last year, when he did not take one. He received a base salary of $600,000 for 2009.

The firm made it clear in a statement that external pressures had contributed to the decision.

"The firm produced very good results for 2009, but the environment is very difficult and the board was mindful of that difficult environment in making decisions about executive compensation," Goldman spokesman Lucas van Praag said.

Blankfein, along with President and Chief Operating Officer Gary Cohn and Chief Financial Officer David Viniar, received 58,381 stock units, worth $8.99 million based on Friday's closing share price.

The units do not convert into shares until 2011 at the earliest, and once converted they cannot be sold or transferred before January 2015, according to the filing.

It was not immediately clear whether the reserved stock could be used as collateral for loans.


The smaller than expected pay packages were the latest sign of how Goldman has sought to soften its image after being excoriated by some commentators and politicians for reaping huge profits after benefiting from various forms of government help.

Blankfein, himself, has found himself in the spotlight time and again during the past year, most notably after he told London's Sunday Times newspaper in November that banks serve a social purpose and are doing "God's work."

The backlash against Goldman has fueled efforts in Washington to enact reforms against the banking industry and to crack down on banker pay.

[Considering the entire financial market was at risk of disappearing, it is offensive to the public that the same people who gambled and lost other people's money, now benefits from the generous bailout conditions and decisiveness of the Obama Administration. Even with the bail out, the economy could have been much worse off. Until Main Street is back to normal, and the national debt is paid down again, bonuses should be taxed to reflect Wall Street's obligation to the people who saved it. It is not backlash; it is common sense.]

But Goldman has answered critics in recent months by announcing top managers would be paid no cash, all stock bonuses, and by surprisingly capping its compensation pool at $16.2 billion for the year -- well short of the $20 billion record set in 2007. It has also made larger charitable contributions than in other years.

"He has quickly gotten religion in terms of being responsive to the ill populist winds that are blowing in his face," said David Dietze, chief investment officer at Point View Financial Services, a Goldman Sachs shareholder. "The citizenry is just outraged that these companies, which took TARP, so quickly turned around and forgot their humble bailouts and are showering themselves with cash."

Goldman received and later repaid a $10 billion taxpayer from the U.S. Treasury's Troubled Asset Relief Program, but also benefited from the rescue of its counterparts, including American International Group Inc, and through cheap borrowing from the Federal Reserve.

If Goldman has managed its way through a difficult year in terms of public relations, some are convinced that 2009 bonuses will be a mere blip for the firm known for its payouts.

"They got paid pretty well the past couple of years, so maybe they can just pay themselves less well this year, then maybe it blows over in a year or two and they can start paying themselves pretty handsomely again," said Blake Howells, director of equity research at Becker Capital in Portland, Oregon.

He called the pay amount "small and pretty restrictive."

Dimon's bonus was in a mixture of restricted shares and options, and he did not take a cash bonus.

Goldman Sachs shares closed up 2.3 percent on Friday at $154.16.


Economic Policy Institute

In 2005, the average CEO in the United States earned 262 times the pay of the average worker, the second-highest level of this ratio in the 40 years for which there are data. In 2005, a CEO earned more in one workday (there are 260 in a year) than an average worker earned in 52 weeks.

The 1980s, 1990s, and 2000s have been prosperous times for top U.S. executives, especially relative to other wage earners. This can be seen by examining the increased divergence between CEO pay and an average worker’s pay over time, as shown in Figure A. In 1965, U.S. CEOs in major companies earned 24 times more than an average worker; this ratio grew to 35 in 1978 and to 71 in 1989. The ratio surged in the 1990s and hit 300 at the end of the recovery in 2000. The fall in the stock market reduced CEO stock-related pay (e.g., options) causing CEO pay to moderate to 143 times that of an average worker in 2002. Since then, however, CEO pay has exploded and by 2005 the average CEO was paid $10,982,000 a year, or 262 times that of an average worker ($41,861).

Figure A: Ratio of CEO to average worker pay, 1965-2005

*Data note:
CEO pay is realized direct compensation defined as the sum of salary, bonus, value of restricted stock at grant, and other long-term incentive award payments from a Mercer Survey conducted for the Wall Street Journal and prior Wall Street Journal-sponsored surveys. Worker pay is the hourly wage of production and nonsupervisory workers, assuming the economy-wide ratio of compensation to wages and a full-time, year-round job.

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