Opinion: Sink Your Claw(back)s Into This

Goldman Sachs executives just received bonus payouts from 2005.
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The outrage over Wall Street, thinking that collectively reduced bonuses is the proper penance for destroying the country's financial system (and arguably the U.S.'s standing in the World), is well deserved.

But what about the execs who seemingly, if belatedly, "got it", and decided to take no bonus at all for last year? The

Goldman Sachs

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crew comes to mind as being at the forefront of such seemingly altruistic activity. If not deserving of kudos, they would at least seem to be relatively undeserving of further slings and arrows of shame.

Alas, no. In an illustration of just how deeply embedded the concept of compensation without responsibility is on Wall Street, the big names at Goldman just received collective tax-free compensation valued at $29.1 million for the bang-up job they did in 2005 and other previous years.

No bonus? No problem

The compensation was in the form of restricted shares issued to the group on January 13. The 11 top executives received a total of 733,424 shares, valued at just shy of $50 million given the stock price on the day. A total of 273,111 shares were immediately sold, however, to account for individual taxes owed on the grants. Hence, a tax-free total take of $29.1 million for the group.

I came across these Form 4 filings while perusing the Goldman insider history on


A million dollar purchase on Jan 22 by Goldman director Stephen Friedman flashed by in my email alert system, and I was hoping it would look meaningful when the whole of the bank's insider profile was analyzed.

It wasn't, of course, and Goldman along with the whole financial sector is still an underweight or no weight as far as I'm concerned. I'll give the insider purchases at numerous banks lately some credence, though. I'm through trying to short the sector.

More interesting than Mr. Friedman's buy was the bunch of non-open market purchases and sales filed the week before his purchase. Eleven insiders with transactions on the same day (Jan 13) at the same price ($76.30) was a tough grouping to miss. Looking further in the past, I saw the same transaction groupings in past Januaries as well.

The groups of trades turned out to be restricted share grants, and nothing too out of the ordinary --in normal times, at least.

Restricted shares on unrestricted terms

But the footnotes on the Form 4 filings this year for the restricted share grants were much more specific than in past years. While some relayed that the restricted stock was "awarded in connection with compensation for years prior to 2008". Several of the footnotes specifically stated that the stock was "awarded in connection with fiscal 2005 compensation."

There was something about that specificity that generated extra ire. Shouldn't the outrage of Wall Streeters pocketing millions in the good years no matter what happens afterwards be extended to these restricted share grants?

In some ways, restricted share grants seem even more offensive to the senses than bonuses taken years ago given that they have been delivered after it is so obvious that what "the brightest guys in the room" did in 2005 was actually destructive to both shareholder value and the nation's financial system.

To be fair, restricted share plans are commonly used by firms on and off Wall Street to act as incentive-based compensation. They are used even more since the ridiculous "incentive stock options as innately evil" argument won the day years ago.

At least "evil" stock option grants have the built-in opportunity to become worthless if management's brilliant performance one year doesn't stand the test of time. For if mismanagement results in a firm's share price falling below an option grant's exercise price before it vests, it isn't worth a thing. With restricted share grants, however, their value is just less if shares decline.

Hence, the 80,559 restricted shares recorded for Goldman Chairman Lloyd Blankfein in past proxies for 2005 compensation - representing $10.8 million in pre-tax restricted stock awards -- were "only" worth $6.1 million pre-tax when they were finally delivered a few weeks ago.

No Defense

Obviously Mr. Blankfein et al paid a price for the fact that the profitable financial crud their firm produced and trafficked in didn't stick to the wall long enough. But not a big enough price. The millions still received for contributing to the financial crisis certainly must have made the decision to forego cash bonuses for last year much more palatable.

To the defense that Goldman execs still deserved the restricted stock awards because theirs is one of the better banks that didn't really need TARP money, I say: Get real. Every one of these big bankers owes the continued existence of their firms to the U.S. taxpayers actually or implicitly supporting them or their peers, including

Bank of America

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Wells Fargo

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JPMorgan Chase

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(C) - Get Report


Morgan Stanley

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-- to name just a few.

Even if one grudgingly agrees that this industry had to be saved for the greater good, it doesn't mean restricted share grants made during the years of false profits should continue as usual.

Arguments that such grants are still necessary to retain the best people do not even deserve a response.

Board to Death

Right about now, some readers may be concluding that this latest restricted stock outrage is just another illustration of why we need more federal oversight, or confirming their disgust at the incredible greed of CEOs. I don't think that's the main answer or problem, respectively.

I don't blame execs for taking what they can, or for taking risks to maximize their pay under a given employment agreement. That's just human nature.

And what do the Feds have to complain about when it comes to seemingly misappropriated funds from publicly traded companies? The money dished out through abuses of long-term incentive plans and cash bonus payouts isn't taken from the Federal government. It's taken from the owners of the firms.

Although the line between the government and other shareholders is blurring, right now it is the regular shareholders who are the aggrieved party when it comes to any undeserved remuneration, not society. And shareholders at publicly traded firms have something called the board of directors that is supposed to be looking out for their interests.

It is the boards that I think deserve the majority of investor distain, and where the most change is needed. The scions of the business world who are supposedly looking after shareholders certainly shouldn't need another federal regulation to force them to do their fiduciary duty.

Time to "Get It"

The debate about what changes are needed at the board level is a long one. But, at the very least, it seems uncontroversial that boards should not allow their executives to continue to reap rewards from long-term incentive plans as Goldman executives just did. Notes I saw in Goldman's latest 10K and past proxies indicate that there are provisions for "Repayment" and Forfeiture". All seem to center around whether executives leave, try to get others to leave, disparage the firm, and the like.

Is there nothing in the forfeiture terms about actual performance standing the test of even a few years time, given that the stated purpose of the plan is to compensate employees "for their contributions to the long-term growth and profits of the firm"? Or is it just that the will is still lacking in the board room to read certain provisions as strictly as they obviously should be read now?

Again, I'm not trying to single out Goldman's restricted share plan and practices as being uniquely unseemly. And I also do not think restricted share plans spawn abuses by their mere existence.

The undisputable takeaway is that compensation absurdities are still going on in the financial industry below the surface of bonus-related headlines, and boards that should be protecting their shareholders from the abuses are still allowing it to happen.

It's not just bad PR. It's poor governance. And it could be actionable. Though a lack of protective wording or rational enforcement of restricted share grants may seem arcane, I think it could turn out to be a bigger scandal than the back-dating of stock options was. It is certainly a bigger outrage given that the abuse is still occurring now, and in the industry that started the whole mess in the first place.

Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights, founder of the Web site InsiderInsights.com and the director of research at Insider Asset Management LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland appreciates your feedback;

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