Goldman Holders Miffed at Bonuses
Some of the largest shareholders in Goldman Sachs Group Inc. have urged the Wall Street firm to reduce the size of its bonus pool, arguing that it should pass along more of its blockbuster earnings to investors, according to people familiar with the situation.
The investors hold tens of millions of shares in Goldman Sachs, which is on track to make the biggest employee payout in the firm's 140-year history.
Their complaints in private conversations with the company and at analyst meetings show how anger over its big-money culture is spilling into the ranks of investors who typically shy away from debates over Wall Street pay.
One frustration: Despite record net income and compensation at Goldman as markets rebound and the firm outmuscles weakened rivals for business, analysts expect its 2009 earnings per share to be 22% lower than in 2007 and roughly equal to its 2006 earnings, according to Thomson Financial.
The decline is caused by issuing more than 100 million shares in the past year to bolster Goldman's financial position and capital. The shareholders have said that reining in the bonus pool would deliver an upward jolt to per-share earnings and the share price, according to people familiar with the discussions.
Some major Goldman shareholders also are concerned about a little-noticed change in the company's financial statements that increased the firm's total head count by adding temporary employees and consultants. The change reduced per-employee compensation, making it look like Goldman employees earn less than they actually do.
The figure is a lightning rod for criticism of Goldman because its staff is on pace to earn about $717,000 apiece for 2009. Excluding temporary employees and consultants would increase compensation per employee to about $775,000.
In the second quarter, Goldman Sachs began including temporary workers and consultants in its overall employee count, according to securities filings. Some shareholders and analysts estimate the company's 31,700-person work force as of Sept. 30 includes about 3,000 nonpermanent employees.
Goldman says it wasn't fiddling with the numbers when it added a footnote to its financial statements in July to reflect the change. The firm's reported compensation and benefits pool always included temporary employees and consultants, but they weren't counted in employee totals, according to the New York company.
As a result, Goldman's average of $661,490 per employee in 2007, widely cited as the high-water mark for Wall Street pay, would be smaller on a comparable basis, the company says. It won't disclose the number of temporary workers and consultants currently on Goldman's payroll.
In response to criticism that Goldman should share more of its wealth with investors, company spokesman Lucas van Praag says shareholders "have historically been more focused on the absolute return on equity and on book value per share growth" than per-share earnings.
Since going public in 1999, the company has generated a total return of 159%, compared with negative 2.1% for the Standard & Poor's 500-stock index, Mr. van Praag adds. Goldman shares have more than doubled this year, though they were down $4.07 a share, or 2.3%, to $172.83 in trading Thursday on the New York Stock Exchange.
The large Goldman shareholders aren't pushing for a huge downsizing of the bonus pool, agreeing with the company that it needs to reward employees for performance. But Goldman should better reward shareholders for this year's rebound, these shareholders contend.
Roger Freeman, an analyst at Barclays Capital, says he has heard from some shareholders who are concerned about how much Goldman delivers to shareholders.
Some investors expect Goldman to pay out a smaller percentage of its revenue in the fourth quarter than it did in previous years. "I would be surprised if they came out with a compensation pool this year that is at the level of prior years," says Tom Marsico, founder of Marsico Capital Management LLC, who often talks to Goldman about compensation and capital allocation. His Denver firm held 10.6 million Goldman shares at Sept. 30
Mr. Marsico is less concerned about per-share earnings than other large Goldman shareholders. Over the years, though, he has unsuccessfully encouraged the firm to reward shareholders in other ways, including a special one-time dividend rather than buying back shares. A one-time dividend this year, however, is unlikely because regulators are working on new capital requirements and Goldman and others would need government approval to issue one.
"We think the compensation debate is coming across as a populist issue, when to us it is really about how Goldman and other firms can best allocate capital and how pending changes in the regulatory framework may change all this," Mr. Marsico says.
Michael Mayo, an analyst at Calyon Securities, says reducing the size of Goldman's bonus pool could ease scrutiny of the firm while boosting shareholders, including Goldman employees who own between 10% and 15% of the company's shares. "Employees stand to benefit, the government benefits and shareholders benefit," he says.
Goldman isn't expected to announce how much it will pay employees for 2009 until the company reports fourth-quarter results in January. Employees are likely to get less cash as a percentage of total compensation but more restricted shares that would vest in the future, in line with Wall Street's response to criticism that old pay practices encouraged risk-taking.
In October 2008, Goldman received $10 billion from the U.S. government as one of the first nine recipients of taxpayer-funded capital injections under the Troubled Asset Relief Program. Goldman repaid the money in June but continues to benefit from government help. For instance, it has the ability to borrow from the Federal Reserve. Goldman and other firms won that access after Bear Stearns Cos. collapsed and was sold to J.P. Morgan Chase & Co.
Goldman had 576.9 million average diluted shares outstanding in the third quarter, up 29% from a year earlier. As of Sept. 30, the five largest Goldman shareholders were AllianceBernstein LP; a Barclays PLC unit; a State Street Corp. unit;, Wellington Management Co.; and Vanguard Group Inc., according to LionShares, which tracks institutional ownership of publicly traded companies.
Goldman reported earnings of $8.44 billion for the first nine months of 2009, up 90% from a year earlier. Compensation and benefits jumped 46% to $16.71 billion. That was equivalent to 47% of the company's net revenue of $35.56 billion.