The Tyranny of the Oversized CEO Bonus: Goldman Sachs' Shareholder Smackdown Shows Senate Must Act Now on Financial Reform

Submitted by Anonymous on Tue, 03/02/2010 - 1:59pm.

Analysis

BUZZFLASH NEWS ANALYSIS
by Meg White

Imagine this: At the end of 2009 -- one of the bleakest years in recent financial memory -- you went to your boss' office, grabbed the company's checkbook and wrote yourself a bonus check.

Your boss says, "Hey! That's way bigger than the bonus I was gonna give you!"

Your reply?

"Tough cookies, sir."

Damn, it must be good to be Goldman Sachs.

The Associated Press reported yesterday that Goldman Sachs' board announced that it will not heed the calls of shareholders demanding an internal review of the company's financial compensation packages. In a filing with the Security and Exchange Commission, the financial institution brushed off the shareholders' suggestion that executive compensation was too high in 2009, adding that it would not consider reforming its pay structure.

If the initial analogy doesn't ring true to you, consider the traditional role of the corporate shareholder. They're generally construed to be the "employers" of a company's corporate management, as well as a company's conscience. Therefore, it makes sense that shareholders' views should be taken into account when it comes to internal price-setting, including compensation determination.

That is, it makes sense to me. But then, I don't own a leading global financial services firm, so what do I know?

If the recent lawsuits and requests for internal review from Goldman's shareholders are any indication, these investors are interested in exercising such restraints. And, taking into account Goldman's reaction, I think we can say fairly that they might need some outside encouragement to listen to their shareholders.

There are many, many financial reforms that Congress needs to enact, and it (by that I mean mostly the slow-moving Senate) must do so quickly and forcefully. Of course, it clearly isn't doing so.

Much of the opposition seems to be concentrated on the notion that American financial success should be determined by the marketplace. While the market has shown itself to be a terrible regulator in the recent past, I respect the consistency of those who tout its virtues in this arena.

And that is why there is no excuse but to pass the Corporate and Financial Institution Compensation Fairness Act in the Senate. Rather than relying on the government to set compensation rates to CEOs of bailed-out companies, this legislation would give shareholders a voice in determining CEO pay. Rep. Barney Frank (I-VT) introduced the bill as H.R. 3269, and it passed out of the House last summer by a vote of 237-185.

While conservative financial commentators trot out consultants who warn of unnamed "loopholes" and "unintended consequences" that would supposedly arise as a consequence of this legislation, a good reason to oppose the bill appears difficult to conjure (one source in the Forbes article says in one breath that the bill will have no effect and is "redundant," while in the next breath promising that it "would paralyze any firm").

Unless, of course, you object to its toothlessness. The shareholder vote would be nonbinding, so that Goldman, for example, could continue to ignore shareholder wishes. This is clearly a problem when we're dealing with headstrong companies like Goldman, which appear to subscribe to the notion that they should be able to run the entire economy without intervention.

Still, I'm guessing the rebuffed shareholders at Goldman would prefer another tool besides the lawsuits they've filed in New York and Delaware regarding executive bonuses. But the bill does make some important changes to the disclosure of incentives-based compensation, which could provide for a shame factor (assuming these CEOs still have access to that emotion). Also, the bill directs the Government Accountability Office to examine the correlation between compensation structure and excessive risk-taking, a study that could help us avoid the next crisis.

To make this abundantly clear, there is much more the Senate needs to do to shore up financial regulation in this country. The scary part is that they haven't even moved on the easiest-to-sell part of financial reform (aside from credit card reform, which they apparently couldn't even do without a ridiculous hand-out to the National Rifle Association).

Perhaps the most vilified entity in American finance these days (besides those who packaged and traded worthless mortgages on the derivatives market) is the CEO who grants himself an oversized bonus check or golden parachute. And the Senate can't even agree what to do with him.

While the American people who don't attend tea party rallies may be fine with the government capping such pay (at least for recipients of bailout money), some may object to a government takeover of executive compensation. OK, then. Let's let the shareholders do it. That's a market-based reform that makes sense.

Yet the Senate can't -- or won't -- pass Frank's bill. And that, in the end, may be the main element to Goldman's ballsy move yesterday to ignore its shareholders. If the most publicly popular limit to corporate power can't even make it through the Senate, Goldman has nothing to fear. Not only is there a total lack of a binding shareholder vote on executive compensation, but more importantly there's the utter lack of a political will to act on any financial reform at all.

After all, why not just smash and grab, if the store keeper will just shrug it off anyway?

BUZZFLASH NEWS ANALYSIS

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This is so crazy to see.

Submitted by inter4522 on Mon, 07/26/2010 - 4:46am.

This is so crazy to see. There are tons of CEO's that are getting bonuses and the companies are not making any money. This has to stop in the future.

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It's Like Peeing Up a Rope

Submitted by Dr Roberts on Wed, 03/03/2010 - 10:41am.

When will the Left wake up and realize that what is definitely not needed as the economy continues its struggle to regain its health, is a raft of half-baked legislation and new Government regulatory agencies. There is already plenty of legislation and laws on the books to accomplish the job with perhaps some additional tweaking at the edges. If lack of supervision and oversight was a crime, half of the regulatory Government bureaucrats as well as most members of Congress would now be occupying cells adjacent to Bernie Madoff. Econ 101 class, an expanding economy needs a healthy banking system as its foundation. The sooner this cloud of uncertaintly created by proposed legislation has been lifted, the sooner banks can get back to concentrating on their primary function of extending credit. And as the economy improves, one would hope less and less attention would be focused on the compensation packages of the most successful individuals in our capitalistic system. It is not as if the country is at PEACE with the world.

What? Pee on a rope?

Submitted by paulfwhite on Wed, 03/03/2010 - 2:38pm.

Gee that's insightful. We don't need ineffective legislation. Personally, I don't recall asking for half-baked legislation or even new agencys.

What I hear the experts saying is that the world financial system would have crashed if we, the tax payers, didn't bail out the financial system. That the largest single cause of the crisis was greedy, short sighted, and deceitful financiers packaging high risk mortgages as low risk financial instruments. (Whether the lies were wilfull, or lies of omission doesn't change their decietfulness.)

What I want is regulations in place to make sure this doesn't happen again. If those regulations are already in place then how do you explain the current mess. If what was done is already illegal, then why aren't people being put on trial. If it isn't illegal, how can you say we don't need to make it illegal.

Late 1920s - Market crash, Great Depression

Solution - Regulations so this "Wont happen again!"

1980s and onward - Deregulation

2008, 09 The Great Recession!

Solution: Bigger bonuses to the very people at the root of the problem.

Sorry that doesn't work for me. I still want to see re-regulation so we can have that healthy banking system. (Econ101)

As for the "most successful individuals" in our capitalistic society. My definition of a successful individual goes well beyond how much wealth and power they can wrest from the rest of us. In fact such extreme compensation demands suggest an out-of-balance personality with some ego issues. I used to feel little more than pity for their lack of insight, but their greed is beginning to affect the general populace in a negative way and needs to be curbed. After all, if not for some pesky regulations, the Mob would have been an excellent example of the most successful individuals in our capitalistic system.

PWhite

Meg, Thank you for an

Submitted by paulfwhite on Tue, 03/02/2010 - 6:15pm.

Meg,

Thank you for an intelligent and restrained analysis. This subject gets me so angry I can only spit and sputter. These people, or at least some of them, should be sitting in jail for their already considerable crimes, Not blithely committing new crimes against our economy. As for congress, their lack of action borders on complicity.

You don't go into the immorality of those plundering the economy, other than an oblique reference to their lack of shame. I suppose that is appropriate for a news analyst. I however feel no such restraints.

Well I guess maybe I do, but it's only out of respect to my Mother that I curb my tongue. I will say that if my bias that these are mostly conservatives who's watch word is Mom, Apple pie, and protect the Family unit. I can think of nothing more corrosive to the fabric of our nation then concentrating such wealth in the hands of so few. I'm starting to sputter so I think I will quit now.

PWhite

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The Tyranny of the Oversized CEO Bonus: Goldman Sachs' Shareholder Smackdown Shows Senate Must Act Now on Financial Reform

Aside from this, Dale

<!-- /* Font Definitions

This is so crazy to see.

It's Like Peeing Up a Rope

What? Pee on a rope?

Meg, Thank you for an

thank you very much dizi

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