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Executive-pay clampdown gets backing from Goldman Sachs CEO

Lloyd Blankfein calls for a 'renewal of common sense.' Some analysts think he may be seeking to blunt an even tougher assault by Congress.

April 08, 2009|Walter Hamilton and Tiffany Hsu

NEW YORK AND LOS ANGELES — The campaign to clamp down on executive pay is getting an assist from an unusual source: the head of Wall Street's most powerful investment bank.

Lloyd Blankfein, chief executive of Goldman Sachs Group Inc., said Tuesday that the financial industry needed a "renewal of common sense" and pay standards to "discourage selfish behavior, including excessive risk-taking."

Blankfein said most compensation should be in stock rather than cash, employees should be required to hold their shares for longer periods and firms should "claw back" previously paid bonuses if employee risk-taking leads to losses.

The proposals would represent a notable shift in Wall Street compensation practices, primarily by binding employee pay to the longer-term financial health of companies.

But with Congress preparing its own crackdown on compensation, some analysts think Blankfein may be seeking to blunt an even tougher assault.

"Companies want to control these issues before legislation does it for you," said Alexander Cwirko-Godycki, research manager for compensation information firm Equilar Inc. "This is somewhat analogous to the movie industry, which created their own rating system before someone else did it for them."

To a degree, executive pay is already reflecting the harsher financial environment. Compensation for CEOs of companies in the blue-chip Standard & Poor's 500 index fell 6.8% last year from the previous year, according to a study released Tuesday by Equilar.

That was the biggest drop since 2002, when the decline was 9.9%. Median pay at financial companies plunged the most -- 38.3% -- to $6.5 million, mainly because fewer than half the companies paid bonuses, Cwirko-Godycki said. The next biggest drop was 21% at conglomerates such as General Electric Co.

Public fury over Wall Street compensation boiled over last month after it was revealed that American International Group Inc. was paying $165 million in bonuses to employees in the unit that generated such severe losses that AIG needed a series of government bailouts, which now total $182.5 billion in commitments.

Critics say the current financial crisis was spurred by compensation structures that encouraged employees to boost short-term revenue and profits in pursuit of massive bonuses. Thus, loan officers wrote subprime mortgages that later defaulted and traders loaded up on risky positions that cost their companies billions of dollars, the critics said.

Goldman CEO Blankfein, speaking at a Council of Institutional Investors meeting in Washington, said that "compensation should take into account strict adherence to a firm's management and controls, especially with respect to a person's judgment and exercising that judgment in terms of risk in all of its forms."

Jeanne Branthover, head of the financial services practice at Boyden Global Executive Search in New York, said the comments could be viewed as a mea culpa.

"It's their effort to say, 'Looking back, we didn't do the right things, but we want you to know that looking forward, there will be change and we're listening to the public,' " Branthover said. "There is no doubt that senior management, the leaders of Wall Street, understand there must be a change in the compensation structure and the mind-set of the employees receiving bonuses."

Blankfein touched only tangentially on the most contentious compensation issue -- whether to limit how much employees are paid -- by reiterating the industry's long-held position that firms need the flexibility to pay incentives to attract the best talent.

And many of Blankfein's proposals already exist to varying degrees. For example, mid- and high-level Wall Street executives receive a large portion of their compensation in stock that they are barred from selling for three years or more.

But any move that forces traders, bankers or others to make decisions based on the firms' long-term interests would mark an important shift from the short-term mentality that dominates today, experts said.

Blankfein himself earned $43 million last year in total compensation, including the value of stock and option awards granted for fiscal 2007 performance at the start of fiscal 2008, according to Goldman Sachs documents filed Monday with federal regulators.

The value of those awards has fallen dramatically, Equilar's Cwirko-Godycki said. Blankfein received $600,000 in salary and nearly $236,000 in other compensation, and the stock and options are now worth $14.6 million.

Various executive-compensation measures have been proposed in Congress, but lawmakers have clashed about the extent to which the government should intervene in setting pay limits and taxing payouts.

The Senate has delayed action on two bills passed by the House to limit executive compensation.

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