The top three executives at Goldman Sachs have just collected over $50 mn each in compensation, while the firm’s former CEO, Hank Paulson, now Treasury Secretary, pocketed $110 mn as a parting gift.
I love that term, compensation. In the universe most of us inhabit, compensation is what you get when someone has injured you. Lesser mortals who work for a living get wages or salaries, which by some mathematical law tend to be several orders of magnitude smaller than compensation. Maybe it would be more honest to call it ‘loot’ or ‘plunder’ when it comes on such a scale.
But what do investment bankers do to merit such record compensation? Witness, for example, the takeover of Cognis, the highly profitable chemical giant, by a private equity partnership that included Goldman Sachs. The predators paid $590 mn in cash and another $3.3 bn in paper five years ago. The now loss-making company is struggling to pay the interest on the loans, but has already made $1.12 bn for Goldman Sachs and its private equity partner Permira.
Then there is cyclical churning. Sometimes investment bankers take fat fees for ‘advising’ companies on mergers and acquisitions. Then, a few years down the line, they take even fatter fees to advise them on spin-offs and re-listings. Often, senior executives of the ‘victim’ companies enthusiastically endorse these deals. Could their decisions possibly be influenced by the combined value of the buyouts and/or compensation for executives? Surely not. As a shareholder, however, I vote against every one of these decisions, just to be on the safe side.
Why do senior executives have such low self-esteem that they think a company can generate more value in private equity hands than under the tutelage of shareholders? Why do they feel they can only do their best when their portfolios are stuffed with options? Surely such an admission should see them fired for incompetence?
On the face of it, the solution for investors is clear: buy shares in investment banks like Goldman Sachs and get a reservation at the table for the feeding frenzy. But the firm’s shareholders were trickle-fed with a mere $650 mn in dividends last year, roughly comparable to the compensation paid to a handful of senior executives, and dwarfed by the $16.5 bn compensation the company paid to its 26,467 employees.
So is there an answer? It is clear the catalyst for many of the undesirable developments in business is sheer greed on the part of hungry executives whom shareholders have left with the keys to the company safe. There is a political case for enhanced taxation of these windfall earnings, to be paid at time of granting. More important is effective shareholder governance to ensure no more buybacks and pie-in-thesky promises of future growth. If there is enough money to splash around, pay it in dividends – and tell each shareholder how much the executive options and bonuses have reduced those dividends.
