Corporate Governance

Goldman, Executive Compensation, and Charitable Contributions (Part 2)

By J. Robert Brown

A NYT article reported that Goldman was considering a program designed to require some employees to contribute a portion of their compensation to charity.  The program was intended to reduce the anticipated criticism of what is likely to be record bonuses.

The article posited that Goldman was in a tough spot.  As the NYT noted:

• Goldman, like its peers, is caught between conflicting constituencies. The bank cut worker pay somewhat last year, and some employees may leave for hedge funds or private equity firms if they are not paid handsomely for their contributions to the firm's profits. Some shareholders, however, want the bank to divert more of its money to them as dividends, though others think it should pay to keep workers happy.

It is likely that there are some financial institutions that would suffer a competitive disadvantage if unable to pay competitive salaries.  Some of the limits imposed by the Pay Czar on companies such as AIG and Citigroup may have caused some talent to go elsewhere. 

But having said that, its absurd to suggest that Goldman is in that position. 

First, the argument presupposes that the "underpaid" employees will be paid more at hedge funds and private equity firms.  In fact, hedge funds are likely to see a reduction in compensation.  Congress seems focused on taxing hedge fund compensation at ordinary income rather than capital gains rates.  So, working for a hedge fund is likely to become less lucrative soon.

Second, the argument defies practical logic.  Hedge funds are shutting their doors.  Are there really enough positions to absorb all of the "underpaid" officials at Goldman?  Moreover, with hedge funds capable of going under at a downturn in the economy, one has to wonder whether the "underpaid" employees at Goldman would give up the relative security of the most profitable financial institution for the relative insecurity of a hedge fund.

Third, and more to the point, even with some reduction in compensation, Goldman will still pay lavish amounts in comparison to others in the same industry.  In 2008, a tough year, Goldman paid 953 employees over $1 million.  Compensation in 2009 will be higher, with Goldman creating even more millionaires.  While this is only guesswork, it seems unlikely that had Goldman opted to pay amounts in 2009 comparable to those paid in 2008, there would have been a serious outpouring of talent.   

Finally, by taking the position that employees should donate some percentage of their compensation to charities, Goldman is all but admitting that it is paying more in compensation than it needs to retain key employees.  

Any argument that Goldman needs to pay the lavish amounts of compensation to keep its employees seems to an outsider looking in to be a very weak justification. 

Full post as published by The Race to the Bottom on January 11, 2010 (boomark / email).