Sunday, February 7, 2010

Goldman CEO's Pay Cut: Is Shaming Working?

I've written in law journals here and here about shaming greedy CEOs arguing that social sanctions could be more efficient than legal regulation in constraining excessive pay. Legal regulation is costly and frequently imposes unintended externalities. I argued that the "greed is good" norm is not widely shared outside Wall Street and that if the relevant constituencies (shareholders, institutional investors, stock exchange regulators, directors, etc) were to impose social sanctions on greedy CEOs, they might internalise desirable norms and engage in more responsible behaviour.

Goldman Sachs's announcement on Friday that CEO Blankfein would only receive $9 million as bonus - all of it as deferred stock that cannot be sold for 5 years - might be a small indication that my shaming argument has some merit. Here's the NYT on the topic:

Goldman made a series of political and business calculations in tallying Mr. Blankfein’s rewards. The timing, too, seemed deft: hours earlier, JPMorgan Chase had announced that its chief executive, Jamie Dimon, would receive a $16.6 million bonus and $1 million in salary. For once, Goldman, known for its big paydays, had grabbed the high ground by paying its chief executive less money. At the top, John G. Stumpf, chief of Wells Fargo, was paid $18.4 million in cash and stock for 2009 though he runs a less complex company. Vikram S. Pandit of Citigroup vowed to accept only $1 in salary until the bank is profitable.

Lucas van Praag, a spokesman for Goldman, insisted that the timing and size of the award was unrelated to Mr. Dimon’s announcement, and he would not say how the directors had arrived at the bonus figure, other than to say: “It’s a reflection of the times. Notwithstanding that there has been some extremely ill-informed speculation and a great deal of unpleasantness, we have shown respect for the environment.”

A person close to the board, however, said that in their discussion the directors had agreed they needed to send a strong statement that the firm understood the mood of Washington and the public.
On top of the bonus, Mr. Blankfein will receive a $600,000 cash salary, the same as in previous years, and other perks like a company car and driver.

The current award must, however, be put in the context of his past compensation — in 2006 he received $53.4 million, and the firm said that since 2000 he has received $181.5 million in total salary and bonus, though he has cashed out only part of it.

This might be a fleeting nod to the prevailing public mood, and given how short public memory is, bankers could return to their old ways very soon. If this window of opportunity for legal reform is used well, it might be possible to design regulation to make such behaviour sticky by creating pathways for the relevant actors to direct disapproval at greedy CEOs in a way that matters.