Can Goldman Sachs reshape Wall Street?
Goldman Sachs should break further from the Wall Street pack and needs a revamped compensation system that rewards people for taking prudent risks.
Goldman Sachs Group's announcement that it will now bestow coveted managing director titles upon its rising
vice presidents every two years, instead of annually, may have shaken the foundation at its New York headquarters. For the rest of the world, even the rest of Wall Street, nothing much will be different.
If CEO Lloyd Blankfein really wants to shake up the industry, Goldman Sachs should break further from what remains of the Wall Street pack, and act like the leader. It needs a revamped compensation system that rewards people for taking prudent risks and penalizes those who take foolish ones.
Ideally, it would apply the best of the incentives and risk- management practices of old Wall Street partnerships — where partners had their own capital on the line and were rewarded only if there was pretax income in a given year — to the current incentive system that, incredibly, continues to reward bankers, traders and executives for taking huge risks with other people's money in expectation of a big bonus.
STILL NO ACCOUNTABILITY
The current system has made the people who work on Wall Street fabulously rich, and given the rest of us one financial crisis after another. It makes no effort to hold financial professionals responsible for their bad behaviour. Instead, they continue to reap all the financial rewards for taking risks with the money of their depositors, counterparties, creditors and shareholders, with little or no accountability when things go awry. After what Wall Street put us through in 2008 and 2009, you would think that the compensation system would have been changed to prevent a repeat. You would be wrong.
Efforts to restore sanity, such as EU's plan to cap bankers' bonuses at twice their salary, are destined to fail: Bankers have already come up with an oh- so-clever plan to raise base salaries enough that compensation goes right back where it was before the cap.
Virtually nothing has changed about the Wall Street compensation system since the crisis, and no one is calling for the kind of reform that would actually change behaviour. Bankers, traders and executives still get paid to take risks with other people's money. These days, compensation and bonuses account for 40-50% of every dollar of revenue. That's great for Wall Streeters but lousy for the rest of us.
This is where Goldman Sachs can show real leadership. It was the last major Wall Street partnership to go public, in May 1999, and it retains more vestiges of its former culture than almost any other Wall Street firm; the others have given themselves over fully to the corporate structure, with its neat legal separation of liabilities from assets. Goldman Sachs has found a little middle ground: its top-echelon executives get paid only if there is pretax income at the end of the year. Needless to say, this pay structure makes this group of more than 450 people — out of the company's 32,600 employees — very focused on prudent risk-taking and profit.
Goldman Sachs should build on this remnant of its old partnership ethos by allowing the creditors and shareholders to go after the assets of those top executives if the bank gets into serious trouble. In bankruptcy court, creditors could seek recovery from these Masters of the Universe.