Blankfein Advocates Partner-Like Compensation, More Regulation, Preservation of Mark to Market

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.

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  1. doc holiday

    I hate it when I have to go to Wiki to figure out what’s going on here:

    A cilice (IPA: /sɪlɪs/) was originally a garment or undergarment made of coarse cloth or animal hair (a hairshirt) used in some religious traditions to induce some degree of discomfort or pain as a sign of repentance and atonement. In more modern religious circles, the word has come to simply mean any device worn for the same purposes.

    Also see: The United States Department of the Treasury played a significant role in the idea of the formation of the fund. Treasury Secretary Henry Paulson championed the idea, with Under-Secretary for Domestic Finance Robert K. Steel taking the initiative in bringing the banks together for the plan. Others questioned the legality of fund participants’ ability to work in concert, supporting price discovery in certain illiquid positions held by the SIVs, in light of United States antitrust law.

  2. doc holiday

    Oh, dang it, a small nugget from Wiki on MLEC: Cartel Blanche

    Again, leaving aside the investment merits of the superfund or its underlying not-so-super assets, antitrust law is normally not something that firms are permitted to ignore, or that Treasury can waive at will. And assessing the benefits of such a cartel to the greater good is impossible without taking both its stated purpose and unintended consequences into account. It all seems very European to us; casually, even flippantly illegal, but orchestrated by power players and conducted in the light of day such that, as long as no one seems to mind, well, then… no one seems to mind.

    The superfund seems ripe for a legal challenge in supercourt. Don’t like the pricing being offered for distressed securities that otherwise can’t find a market price, and you can’t find a buyer outside of a highly unusual consortium consisting of natural competitors? The cartel won’t deal with you as a buyer except under terms that you might allege are predatory? Refusal to deal; predatory pricing; prohibitive of free trade; anti-competitive; bid-rigging… take your pick of potential antitrust sins here. Sounds like the kind of thing we have too many litigators for.

  3. alexblack

    I believe there are a few million dollars in the House version of the Stimulus Bill allocated for hairshirts….

  4. Dave

    Perhaps Blankfein proposes to make all US taxpayers “limited partners” in the Goldman enterprise, thanks to our generous funding of GS via the TARP. (This of course applies to the other primary dealers — sorry, “banks” — that we have been forced — at Hank Paulson’s fiscal gun-point — to bail out).

    So how about it, Blankfein? When do I make Partner?

  5. S

    didn;t GS just accelerate the vesting of their stock options for employees as a sop to the the lower cash component. IUS this the same whiner that went running to the SEC when the big bad people were shorting his company into the ground on the solid basis of insolvency.

  6. Independent Accountant

    I just read Blankfein’s piece. I saw it as an after the fact rationalization of his mismanagment. This clown should be fired. I agree with Dave, when will we all become GSG managing directors? I will prepare a post on Blankfein’s comments. The only thing I agree with him about is the need for good accounting. But doesn’t GSG have a CFO? Doesn’t GSG have a Big 87654 CPA? What a pile of rubbish.

  7. Mike Sankowski

    The investment banking and trading sides are going to have to be privately held. There was a reason they were private and they had the partner style compensation, and it had to do with risk. When you had 15 more years to payout, you had a different perspective on risk.

    When you had 1 year to payout, you made sure your 3 year hires were not going to ruin your retirement.

    That article by Michael Lewis was great – because it showed that none of them could resist the temptation of quick, huge money. The result of a systemic collapse was probably inevitable at that time, but the method by which this collapse would be effected was not.

  8. Kady

    I couldn’t agree w/ Mike above more. Not only should i-bank and trading side be privately held (and returned to old partnership models), we should get rid of limited liability for said partnerships so that partners are open to personal liability for their actions.

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