How much of a bank executive's discretionary compensation should remain at risk for years beyond the year it was awarded? All of it, Goldman Sachs has concluded.
The decision announced Thursday could reverberate across the industry and might influence compensation lower down the seniority ladder than the 30 top corporate decision-makers directly affected by Goldman's new policy.
Goldman says 100 percent of this year's bonus awards for its 30-member "management committee" will be paid in the form of equity "shares at risk." Those shares cannot be sold for five years, during which they are subject to an "enhanced recapture" (i.e. clawback) provision pegged to each affected employee's diligence in assessing and communicating risks. Its intention in strengthening an existing clawback policy is "to ensure that our employees are accountable for the future impact of their decisions, to reinforce the importance of risk controls to the firm and to make clear that our compensation practices do not reward taking excessive risk." Goldman also will allow shareholders an advisory vote on its executive compensation at its 2010 annual meeting.
Extending an Industry-Wide Trend
A broad trend toward deferring a greater portion of bankers' bonus awards has been gathering steam across the industry for the past few years. Clawback provisions have proliferated as well - encouraged by regulators who concluded that the traditional practice of awarding cash bonuses in one year with no future penalty if instruments an employee bought or created became worthless in a subsequent year is tantamount to "heads I win, tails you lose." From mid-2008 and throughout 2009, Morgan Stanley, Credit Suisse, UBS and other top-tier institutions introduced or strengthened clawback provisions affecting a wide range of employees in front-office roles - primarily bankers and traders whose decisions place capital at risk.
Goldman's latest move marks a significant extension of both trends. The announcement follow meetings in recent weeks between shareholders and top Goldman executives who sought to defuse what The Wall Street Journal last week called "an investor backlash" over the bank's record compensation pool.