Reuters and other news services report that Goldman Sachs CEO Lloyd Blankfein, during a speech before the Council of Institutional Investors, weighed in on the need to reform Wall Street’s pay packages . Obviously, this is an issue I’ve written about quite a bit (with pieces in Forbes, the Boston Globe, and Marketwatch) — it is great to see a major Wall Street executive showing some leadership on this issue.
With regard to pay, Blankfein calls for a number of reforms: 1) greater percentage of compensation in company stock with a multi-year vest, 2) Bonuses that recognize not just the profits earned, but the risks taken, and 3) evaluating whether compensation-driven incentives “work against the social good.” While I think these are steps in the right direction, I would prefer to see this driven through Wall Street’s self-regulatory structures; Blankfein seems to suggest that legislative action is needed. Legislative solutions lack the flexibility to deal with future circumstances and become hostage to political whims.
From my own experience, I’ve seen that a high percentage of stock ownership (item #1 above) may conflict with broader needss (as in item #3 above). Wall Street has greater responsibilities to its customers than many businesses. The industry works best when it achieves a balance between the interests of shareholders, employees and customers. An undue emphasis on share performance can lead to short-changing the customer. A great example of that was the corruption of research by investment banking in the late 90s. Good for the employee (bonus), good for the shareholder (earnings), but bad for the client who relied on the tainted research. Reforms discussions need to consider raising the salary component of compensation, and removing tax code impediments to this approach. This would make compensation costs transparent to shareholders, encourage broader thinking and risk assessment on the part of employees, and serve clients better. On the other hand, it is unlikely that, under such a pay regime, Mr. Blankfein would have another year like 2007 when he earned $70.3 million. I wonder why he didn’t bring that up in his speech?