Corporate Governance

The Problem of Executive Compensation: The Excess Continues

By J. Robert Brown

The WSJ reported that Goldman has been visiting with shareholders in an attempt to justify its extraordinary compensation practices.  As the article notes:  "So far, Goldman has shown no signs of backing down to anger over the firm's pay and benefits, on track to hit a record high of about $717,000 per employee, consultant and temporary worker for 2009, nearly double last year's $364,000." 

As part of these efforts to justify the compensation, Goldman has been distributing a memorandum that asserts that Goldman outperformed other "sectors" of the economy.  As the memorandum notes:  "Goldman Sachs generated an average pre-tax margin of 29% between 2000 and 2008, besting all the sectors in the Fortune 500."  It is, of course, a cherry picked set of comparisons, one that does not claim it outperformed all other companies, only sectors of the Fortune 500.  Presumably other companies have done the same thing without needing to resort to the same levels of compensation as Goldman.

The memorandum by the way put considerable weight on the approval of compensation practices by the independent board of directors.  While the compensation of these directors for 2009 has not yet been disclosed, they were paid in 2007 almost $700,000 each.  Its not only the officers and other employees who do well at Goldman. 

Goldman has certainly done well during the financial crisis.  But the amounts and the efforts to justify them reflect at best a tin ear and at worst an indifference to the economic situation of most Americans.  Just as this story broke, the Journal reported that the economy had shed another 169,000 jobs, with unemployment remaining at 10.2%.  Moreover, as Goldman raises the tide, other companies will likely float along with it, raising their compensation (and justifying it by arguing that they will otherwise lose talent to Goldman). 

The story was paired with one about Bank of America deciding to repay its TARP money to the government.  The repayment will largely free BofA of government oversight of compensation practices, particularly the onerous requirements imposed by the Pay Czar. 

In other words, the limitations in TARP were temporary.  The effort to use morality or public pressure to reduce compensation have failed abysmally.  Legal restrictions on compensation are necessary.  As we will discuss, the American Financial Stability Act is going in the right direction.  It contains a prohibition on excessive compensation.  Its time to impose a federal standard, one that will subject directors to meaningful standards in setting compensation. 

Full post as published by The Race to the Bottom on December 03, 2009 (boomark / email).