Shareholders Win with Goldman's Bonus Pool Cuts

The message from Goldman Sachs (GS) is loud and clear: We get it!

Bowing down to pressure from Washington, shareholders and the public who have been outraged at the lofty bonuses that continue to be lavished on Wall Street, despite widespread woes in the rest of America, Goldman slashed its bonus pool in the fourth quarter by $519 million. That brought the total compensation – salary and bonus – for 2009 at $16.19 billion, or 35.8% of revenues.Besides lawmakers and President Obama, who said "fat cat bankers . . . still don't get it," Goldman has in recent months faced lawsuits from shareholders calling on the company to reduce its sky-high bonuses.

Goldman Sachs CEO Lloyd Blankfein, once the highest-paid Wall Street CEO, said that the firm's decision to award the "lowest-ever compensation to net revenues ratio," was a "recognition of the broader environment."

By reducing the amount the bank set aside for its employees' compensation, Goldman also dramatically added to its bottom line and blew past analysts' expectations of earnings. In the fourth quarter, it earned $4.95 billion, or $8.20 per share, compared to estimates of $5.20 a share estimated by analysts surveyed by Thomson Reuters. For the full year, the firm earned $13.4 billion, higher than its previous record of $11.6 billion in 2007.

A Victory for Shareholders

Goldman's back-tracking was seen as a victory by shareholders who have in the last two months filed lawsuits against Goldman Sachs and its board of directors contending that its large compensation payouts "are a breach of the board's fiduciary duty."

"We believe that our case has played a major role in saving $6 billion for shareholders, which the company can now use rather than pay to company executives. We hope that the company will use these funds to help the economy and other businesses," says Lynda J. Grant, an attorney at The Grant Law Firm, in an interview. Grant represents Ken Brown, an Illinois shareholder, who has filed suit against Goldman Sachs and its board of directors on Jan. 5 in a New York court. Grant was referring to the $6 billion that Goldman was expected to set aside for compensation in the fourth quarter, instead of which the company decided to pare down compensation set aside in the first nine months.

In another lawsuit, institutional investors Central Laborers' Pension Fund and the Security Police and Fire Professionals of America Retirement Fund accuse "Goldman's board of directors of blindly following a pre-set policy that sets compensation at nearly 50% of the firm's revenues without regard to the source of the revenues, the employees' performance, or the best interests of the corporation or its shareholders."

The investors say in their complaint that since going public in 1999, "Goldman has paid out a staggering $104.9 billion in compensation to its employees. In contrast, Goldman's net earnings during the same period have been only $46.8 billion."

Goldman Sachs maintains that its compensation structure is fair. Spokesman Ed Canaday says that from 2000 to 2007, the firm has produced a compounded annual growth rate of over 20% in earnings per share. "Adjusted for increased head count over the same period, aggregate compensation expense increased less than 10% per year," he says.

While Goldman says the lawsuits are "without merit," Grant says that today's outcome is "a recognition on Goldman's part of the merit of the allegations in our lawsuit that they couldn't have performed as well as they did without government assistance. At a time when credit was tight and liquidity was non-existent, they got billions of dollars on which to trade and make profits."

Still, an annual compensation of $16.19 billion is by no means a small amount. It's up 48% from 2008, and works out to an average of about $498,246 per employee at Goldman Sachs.

Grant says she plans to pursue the case, in court hoping that shareholders like Brown can cause Goldman to create "products that are not high risk merely to generate fees in the short term, but rather products that create real value and promote growth in a capitalist society."
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