Goldman CEO Says Pay Backlash Is 'Appropriate'
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WASHINGTON — After years spent raking in millions as a top executive of Goldman Sachs Group Inc., Lloyd Blankfein said Wednesday that outsized banker pay encouraged excess and worked "against the public interest."
The furor over bankers' pay after last year's financial crisis often was "understandable and appropriate," Blankfein told the Handelsblatt Banking Conference, according to remarks prepared for delivery in Frankfurt, Germany.
"There is little justification for the payment of outsized discretionary compensation when a financial institution lost money for the year," the Goldman CEO said. He said bonuses are important to attracting and retaining top talent, but "misapplied, they can also encourage excess."
Experts on executive compensation were skeptical that Blankfein's remarks would lead to action, and critics said he may be trying to avoid tougher government rules on pay.
Blankfein agreed last spring not to take a bonus for his work in fiscal year 2008. But in 2008 he topped the list of highest-paid Wall Street executives, with a pay package totaling $42.9 million, according to an Associated Press analysis. Most of that was in the form of stocks and options awarded for his performance in 2007.
In the speech Wednesday, Blankfein laid out compensation principles that he said should apply throughout the financial industry. They included: making the largest pay packages more performance-based, deferring compensation to reflect long-term performance, banning contracts that guarantee high bonuses and making top managers keep most of their pay in stock until they retire.
New York-based Goldman first released the standards in May. They are similar to ideas under discussion at the Federal Reserve, which is developing new guidance for compensating financial executives.
But as it has returned to health, Goldman has set aside significantly more to pay its employees. Goldman's costs for compensation and benefits rose to about $11.4 billion in the first half of 2009, up 33 percent from a year earlier. All of that wasn't paid out; the company can use it for discretionary compensation at the end of the year.
Based on the latest compensation and benefit figures Goldman disclosed, that breaks down to $386,429 for each of its 29,400 employees.
As big banks return to profitability, the impulse to retain top performers by giving them outsized pay packages becomes greater, said Mark Borges, a principal with Compensia, Inc., a Northern California compensation consulting firm.
"There's a fear that we're going back to the same pay system that got us into trouble," Borges said. "He may be advocating for linking pay to long-term performance, but the problem is that the pay system in the banking industry isn't set up that way. "
Public outrage about bankers' pay erupted last winter as the global financial system faltered. The first explosion came when the failed insurance giant American International Group Inc. paid $165 million in bonuses after the government committed $180 billion to bail out the company.
The Obama administration appointed a pay czar, Kenneth Feinberg, to address pay practices at banks that took money from the $700 billion financial bailout. Feinberg's rules will not affect Goldman because the bank repaid its $10 billion in June.
The House of Representatives passed a bill in July that would give shareholders more say in executive compensation and expand regulators' power over pay packages. The Senate has yet to take up the measure.
European governments have taken a tougher line, arguing for strict caps on individual payouts and collective bonus pots at financial institutions. But that idea was rejected at a meeting of top finance officials from major governments in London last week. The group, which includes Europe, the United States, Russia, India, South Korea and other major economies, instead agreed to draft principals for consideration at a meeting of national leaders in Pittsburgh later this month.
The policies that group will consider are likely to resemble Blankfein's call for greater accountability to limit risk.
Blankfein's call for banks to change their pay practices could be an attempt to ward off tougher federal regulation, critics said.
"I think he's trying to put out the message that the government shouldn't feel the need to meddle in compensation matters and that companies like Goldman are going to voluntarily do the right thing," said Sarah Anderson, a director at the Institute for Policy Studies, a Washington-based think tank that has been critical of Wall Street pay practices.
In a report released last week, Anderson's group reported that the top five executives at the 20 banks that took the most federal bailout money received average compensation of $32 million each from 2006 to 2008.
Blankfein also addressed concerns that overly complex financial products destabilized the financial system, and laid out broad principles for regulation that would limit systemwide risk. He has been chairman and CEO of Goldman since 2006, and was president and chief operating officer starting in 2004.
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AP Business Writers Rachel Beck and Stevenson Jacobs in New York contributed to this report.
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DANIEL WAGNER 09/ 9/09 06:08 PM ET Associated Press