Goldman investors take aim at exec pay

Never mind philanthropy, what about us? The top shareholders at Goldman Sachs are getting restive, it is reported - and not before time.

While the great vampire squid has been trumpeting the modest and self-interested donations it is making to charity in an attempt to pay reparations for the credit catastrophe, its investors are finally rousing themselves to play their proper role in taming Wall St pay.

Or at least, maybe just a little bit. Some of Goldman's biggest shareholders are said to have asked, politely, behind closed doors, for a slightly bigger share of the money pot.

The surge in trading profits this year means a bumper bonus pool for disbursement at year-end. Long-term shareholders, though, have done less well. Goldman issued so much new stock to bolster its balance sheet during the market panic that there will actually be a big drop in earnings per share. Clipping the bankers' bonuses would boost earnings nicely, they say.

The initial comeback from Goldman after the weekend's gossip was that no investor has actually gone as far as demanding a specific meeting to discuss this issue. In any case, it says, employee and shareholder interests are aligned. That is missing the point.

Those interests are indeed aligned, directionally, most of the time, but it is not about direction, it is about proportion. How much of the upside should employees have, how much should go to shareholders?

We should all favour a higher proportion to shareholders, for a couple of reasons. Most obviously, many of us will be shareholders through our pension and mutual funds. Also, if shareholders have more to lose when bets go awry, they might pay more attention to the risk management systems within banks, an area woefully under-examined in the run-up to the crisis.

At investment banks, of course, the wage bill of top earners really does crater the bottom line. Somewhere between 40 and 50 per cent of net revenues have traditionally been put into the pool for salaries, benefits and end-of-year bonuses. It is a good time for shareholders of Goldman and its peers to be pressuring for that number to come down.

The returns on equity that banks enjoyed during the reckless years are going to be coming down as regulators apply new curbs on derivatives trading and demand that big bets are backed by more capital.

Shareholders ought to be compensated for these earnings-crimping reforms.

Go on. Strike up the usual chorus: "If you cut bonuses, you will simply drive the best employees to leave for the competition."

I wouldn't deny that entirely, but it is not the whole truth. If it were, how would Goldman be able to boast, as it has, that its compensation ratio has always been "at or among the lowest" in the industry? Reputation and intellectual dynamism counts, just a little, even when it is bankers who are choosing where to work. It is also tempting to call some bluffs, and see if lower-paid employees really are less talented than the supposed rainmakers.

If compensation is coming under pressure all across Wall St, the issue should be less acute, in any case.

And shareholders have an incentive to act together to douse the public fury on Wall St pay.

It is difficult to know how long governments can hold the line against pay caps and other draconian measures sure to have unintended consequences.

Usually, the executive wage bill does not put a big enough dent in earnings per share for any single shareholder to be bothered with. That's not the case on Wall St.

- INDEPENDENT