What would Lloyd do?

Posted by Marc Hodak on April 7, 2009 under Executive compensation, Revealed preference | 2 Comments to Read

Goldman Sachs CEO shared his idea of how executive compensation should look:

•  Compensation should take into account strict adherence to a firm’s management and controls, especially with respect to a person’s judgment and exercising that judgment in terms of risk in all of its forms.  That evaluation must be made on a multi-year basis to get a fuller picture of the effect of an individual’s decisions.

•  Individual performance must not be viewed in isolation. Individual compensation should not be set without taking into strong consideration the performance of the business unit and the overall firm. Employees should share in the upside when overall performance is strong and they should all share in the downside when overall performance is weak.

•  No one should get compensated with reference to only his or her own P&L. Compensation should encourage real teamwork and discourage selfish behavior, including excessive risk taking, which hurts the longer term interests of the firm and its shareholders.

•  Compensation should include an annual salary plus deferred compensation, which is appropriately discretionary because it is based on performance over the entire year.

•  The percentage of compensation awarded in equity should increase significantly as an employee’s total compensation increases.

•  For senior people, most of the compensation should be in deferred equity.  Only the firm’s junior people should receive the majority of their compensation in cash.

•  As I mentioned earlier, an individual’s performance should be evaluated over time so as to avoid excessive risk taking and allow for a “clawback” effect.  To ensure this, all equity awards should be subject to future delivery and/or deferred exercise over at least a three-year period.

•  And, senior executive officers should be required to retain the bulk of the equity they receive until they retire.  In addition, equity delivery schedules should continue to apply after the individual has left the firm.

In other words, it should look a lot like Goldman Sach’s executive compensation plan.

The cynical will say it’s self-serving to basically advocate an incentive plan like the one you already have.  But the cynics are wrong.  Goldman fared better than almost any other financial firm through this credit crisis.  If Lehman, Bear, or AIG were as well run, the world would have a few extra trillion dollars that it doesn’t now have.

Nevertheless, Goldman was forced to sit in the penalty box with the other Wall Street firms, given “help” they didn’t want or need, and not allowed to return the funds forced on them.  The reason was so the banks that really f*ked up wouldn’t feel so stigmatized.  The effect was to stigmatize one of the few firms that didn’t deserve it.

Lesson:  It’s not wealth that government wants to spread around.