Lloyd Blankfein, in a Financial Times comment, offers some suggestions to policymakers and regulators on how to deal with the financial services industry.
I’m sure most readers would like to see more sackcloth and hair shirt, less prescription. But setting the tone aside, I found one bit particularly interesting. Blankfein proposes that firms go back to comp arrangements that bear a strong resemblance to how investment banks operated as private partnerships:
More generally, we should apply basic standards to how we compensate people in our industry. The percentage of the discretionary bonus awarded in equity should increase significantly as an employee’s total compensation increases. An individual’s performance should be evaluated over time so as to avoid excessive risk-taking. To ensure this, all equity awards need to be subject to future delivery and/or deferred exercise. Senior executive officers should be required to retain most of the equity they receive at least until they retire, while equity delivery schedules should continue to apply after the individual has left the firm.
This would be a significant change, and would eliminate many (but not all) of the problems of bad incentives. Heavily equity-linked pay, and with it effectively retained in the firm, and effectively subject to adjustment if excessive risk-taking or bad conduct comes to light, would better align incentives with what is best for the business (and external shareholders). And having gradual equity draw down after the producer has left the firm is also straight out of the old Goldman playbook.
The problem is that the shares will still be traded publicly, and there will be temptations to please the market at the expense of sound long-term strategies. But Blankfein’s sketch is a big improvement over the practices now in place.