Goldman's Bonus Plan Draws More Fire

NEW YORK ( TheStreet) -- Goldman Sachs ( GS) may have forgotten that investors are taxpayers, too.

Some large Goldman shareholders are reportedly unhappy with the firm's plans to pay big bonuses this year -- a rare example of Wall Street and Main Street being on the same side of an issue.

From bonus and dividend payments to the amount of leverage and lending they're engaged in; the government has kept a firm grip on the banking sector over the past year. It has used both carrots and sticks to achieve its goals, with varying success -- financial incentives to rework bad mortgages have been effective, but its notion to create a "pay czar" may have been doomed since the brainstorming session for his title.

Banker pay has been a lightning rod, not just for the seven firms whose compensation is closely monitored by the czar, Kenneth Feinberg, but also for healthy, profitable banks like Goldman that are struggling to move past the bailout stigma. Feinberg has flexed his muscle already, nixing some pay practices at American International Group ( AIG), Citigroup ( C), Bank of America ( BAC) and others.

The banking industry, and many investors, appeared as though they just wanted to get past the compensation "scandals." They were content with revisions that tied compensation more closely to long-term performance; for example, by weighting pay in stock that doesn't vest for a few years.

But on Friday, the Wall Street Journal reported that "some of the largest shareholders," who hold tens of millions of Goldman shares, are unhappy with its pay practices, and have been urging management to reduce its 2009 bonus pool. The news was a headscratcher, since Goldman appeared to have done everything right from a stockholder point of view.

Goldman avoided (and actually profited from) the subprime housing mess; was one of the first major banks to repay bailout funds; has reported rockstar profits this year to the tune of $7.4 billion; and its stock has responded accordingly, up more than 200% in the past 52 weeks. The company has already revised compensation practices to align them better with stock performance, but that doesn't seem likely to reduce the dollar amount of bonuses: Goldman is on track to pay employees $23 billion in awards, the largest in its history.

The Journal says stockholders are critical of a couple of points. First, because Goldman has issued 100 million new shares to bolster its capital position throughout the financial storm, even if its earnings surge, per-share profits will be lower than the levels seen prior to the crisis.

And secondly, just as per-share profits track lower, per-employee revenue is muddled by the addition of temporary workers and consultants in the firm's overall employee figures. Goldman began counting those employees in the second quarter. The difference would boost per-employee compensation from $717,000 to $775,000 if those that aren't permanent, full-time workers are excluded.

One large shareholder, Tom Marsico, told the Journal that he'd be surprised if the firm boosted bonus payments, but asserts that the issue comes down to "how Goldman and other firms can best allocate capital." But another factor is probably playing a role in investor discord as well: Pure gumption. It looks bad to make a lot of money and boost bonuses as others in the market and broader economy are suffering.

The negative attention is weighing down Goldman in terms of public perception and how the government may or may not respond. (Goldman had protestors outside of its Washington, D.C., office this week.) While reputation is an intangible item that's hard to quantify in relation to stock price, it certainly is a factor.

So far, the firm has done a decidedly poor job in handling the criticism. CEO Lloyd Blankfein initially responded to criticism by saying the company provided a social benefit in extending capital. He said the firm was doing "God's work," and defended compensation practices, but also acknowledged how divisive the notion of banker pay has become. (He told the Sunday Times that he could "slit my wrists and people would cheer.)

Blankfein apologized for the comments a few days later, and Goldman recently unveiled a small-business assistance program, characterized as a charity project, to fend off detractors.

It's unclear how management will ultimately handle the pay controversy. Goldman is expected to unveil bonus awards when announcing its 2009 results in January. With investors, public-advocacy groups, and the government at its throat, there's one appropriate word of blessing: Godspeed.

-- Written by Lauren Tara LaCapra in New York.

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