Johnathan Moreland
Jonathan Moreland
Inside the Markets: Sink Your Claw(back)s Into This

See what Goldman Sachs execs just got paid for 2005.

March 16, 2009
by Jonathan Moreland

[DISCLOSURE: Readers should assume that all stocks mentioned in this column are owned by the author and/or his firm unless otherwise noted.]

The outrage over Wall Street thinking that collectively reduced bonuses was the proper penance for their now obvious roll in 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? As some CPA Insider(TM) readers may already know, the Goldman Sachs (GS: NYSE) 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 received collective tax-free compensation valued at $29.1 million this January 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 in January. 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, the 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 InsiderInsights.com. A million-dollar purchase in mid-January by Goldman Director Stephen Friedman flashed by in my e-mail alert system and I was hoping it would look meaningful when the whole of the bank’s insider profile was analyzed yet again on my system.

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 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 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 in the month of January 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," others 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 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.

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 shares grants, however, their value is just less if shares decline. Hence, the over 80,000 restricted shares that represented the $10.8 million in pretax restricted stock awards to Goldman Chairman Lloyd Blankfein recorded in past proxies for 2005 compensation were "only" worth $6.1 million pretax when they were finally delivered a few weeks ago.

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. I don't think that's the main answer or problem, respectively.

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.

While those two entities may well merge in the future as it pertains to financial institutions, right now it is the 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 your clients' disdain and in which the most change is needed. The scions of the business world that 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 of which center around whether executives leave, try to get others to leave, disparage the firm and the like.

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.

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Jonathan Moreland, is the Director of Research at New York-based InsiderInsights.com. View a FREE trial issue of the firm's weekly newsletter InsiderInsights.