Goldman Sachs’ changes to its bonus structure for its 30 most senior executives strikes me as, if not a perfect scheme, a solid step in the right direction.
The main flaw is that it has confined the paying of bonuses in shares that remain restricted for five years to members of its management committee rather than all 400 of its “partners”.
This means the incentive not to take excessive risk in search of short-term trading profits is still placed on its business heads rather than spread throughout its operating divisions.
That said, Goldman is moving back towards a more partnership-based remuneration structure, which it gave up at its 1999 initial public offering. I have written before about the advantages of this approach to pay, and the adverse consequences of the IPO.
The fact that it is putting the scheme to an advisory vote of its shareholders (even though 15 per cent of the equity is held by insiders) is welcome.
Goldman is also going further than others in implementing a clawback mechanism over those five years that punishes malfeasance not only but also a lack of care. If its most senior executives really feel that their own compensation is “at risk”, they have a useful incentive.
Finally, it has extended further the period during which shares first vest and then are available to employees to sell. Last year, it added a year to the vesting and delivery schedule to take it from three to four, and it is now five for the top 30 employees.
That is still not a full business cycle but it is a significant period of time.
Incidentally, Goldman has been criticised for its public relations recently, but whoever thought up the idea of rebranding restricted stock as the tougher-sounding “shares at risk” deserves a bonus.