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Goldman Execs Pressure Peers

November 25, 2008

When Goldman Sachs Group CEO Lloyd Blankfein and CFO David Viniar—along with five other top officers at the firm—announced last week that they’ll give up their bonuses for this year, their gesture may have marked the beginning of a $1 billion swing in pay at major financial institutions.

Goldman’s top brass will earn just their annual base salaries this year, which, at around $600,000 each, would register as little more than a rounding error on their typical total-compensation packages.

It also means that the seven executives as a group will be taking home nearly $320 million less than they did last year, when Goldman generated record revenue and earnings and the rest of the financial services world was still deemed to be on firm footing.

Goldman has paid its executives more than any other financial institution in recent years—by a wide margin. Since going public in 1999, its top tier has received roughly $1.1 billion in bonuses and incentives.

The move to forgo bonuses this year—a period in which Goldman’s earnings have dropped substantially, its share price has plunged 70 percent and its capital infusion from the federal government has totaled $10 billion—has set the stage for other financial behemoths that have suffered similar or worse fates to follow suit.

Nine of the largest financial institutions (including Goldman) paid their top executives a combined $1 billion in total compensation last year, according to a Financial Week analysis of the proxy filings of Bank of America, Bank of New York Mellon, Citigroup, JPMorgan, Merrill Lynch, Morgan Stanley, State Street and Wells Fargo. (These were the first nine financial institutions to receive a combined $125 billion in capital last month from the Treasury Department as part of the Troubled Asset Relief Program.) Roughly 98 percent of this $1 billion in pay was handed out to the top executives at these firms in the form of bonuses and other incentive awards last year.

Even before Goldman’s leadership volunteered to give up their bonuses, it was clearly shaping up to be a miserable year for bonuses in the financial services industry.

“But now, Goldman’s move has put enormous pressure on its peers to accept nothing but a base salary this year as well,” said David Schmidt, of compensation consultancy James F. Reda & Associates. “They’ve set the standard—and everyone else will fall in line.”

Already, overseas banks Barclays and UBS have followed Goldman’s lead and announced last week they would forfeit any bonuses this year.

UBS also noted it will overhaul its executive compensation model next year. Bonuses will not be paid to UBS executives right away but will be held in escrow, a move that would allow the company to claw back pay after it has been awarded.

In the U.S., pressure has been mounting, particularly on Citigroup and insurer American International Group, to make a similar move. New York state Attorney General Andrew Cuomo, for one, publicly called out executives at both companies last week after Goldman’s revelation.

“After four consecutive quarterly losses, it seems only fair that top executives should shoulder their fair share of these difficult economic times,” Cuomo asserted after Citigroup announced November 17 that it would eliminate about 52,000 jobs. “It would send the wrong message for Citigroup’s top brass to collect bonuses while investors, taxpayers, and now Citigroup’s own employees suffer.”

At Citigroup, which received $25 billion in capital from the Treasury last month, top executives received nearly $65 million in bonuses and stock awards last year, according to its 2008 proxy filing.

AIG, which lost $25 billion in the third quarter and has needed $150 billion in financing from the Treasury, dished up roughly $28 million in bonuses and incentive payments to its top officers last year, according to its proxy filing.

It’s unclear what executives at these and other financial companies would be entitled to if they do end up collecting bonuses this year, but certainly it would be a fraction of what they took home in 2007.

In Goldman’s case, top executives turned down year-end payouts that could have amounted to more than $50 million combined, according to a Financial Week analysis of Goldman proxy filings and annual reports since 1999.

Goldman has never awarded its executive officers bonuses that totaled less than 1.3 percent of earnings since it became a publicly traded company, according to the analysis.

The lowest total level of annual bonuses that Goldman has awarded its officers: $43.8 million in 2002, when the company generated $3.3 billion in earnings on $14 billion in revenue, virtually unchanged from its 2001 earnings number.

So far this year, Goldman has reported $23.8 billion in net revenue and $4.4 billion in pretax earnings through the first nine months of the fiscal year that ends November 28.

It is widely expected to post a loss for the fourth quarter—its first loss since going public. But Goldman’s top tier still could have lined up for bonuses totaling $57.2 million, if the year-end payouts were based on the historically low 1.3 percent-of-earnings benchmark.

“This could just be a one-time gesture, given the economic climate and the [political] circumstances surrounding a number of banks and financial institutions,” said Jim Allen, senior policy analyst at the CFA Institute. “But there’s a chance it could be reflective of a new compensation model at financial firms, one that takes a longer-term view and is essentially risk-based. That would be much more significant.”

Filed by Mark Bruno of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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