Bank shareholders: Bank shareholders finally seem ready for more pie. Until now, they’ve largely shrugged at the outsized proportion of revenue firms dole out to their bankers. But at last, some Goldman Sachs investors are carping for lower bonuses and higher retained earnings – in a bid to drive up the share price. The added political storm makes it a perfect time for banks to revisit the model.
The evidence is thin to justify investment bankers being paid like movie stars and elite professional athletes. But shareholders have gone along with the idea that it’s perfectly acceptable for bank employees to command half of their employers’ revenue. The self-perpetuating idea that top performers need to be rewarded with higher and higher bonuses to deliver largely commoditised services has nevertheless been codified into the oligopolistic system.
In some ways, Goldman may not be the ideal target for investor grumbling. Its bonus pool will be the highest – but its compensation ratio probably won’t. What’s more, its shareholders have been well rewarded. Including dividends, they have more than doubled their money over the last decade. Goldman also has outperformed rivals on return on equity and book value per share.
But Goldman employees are set to do better than shareholders this year. The bank, which on average cut pay more sharply than peers last year, is on pace to match the record bonus payouts it made in 2007. Earnings per share, however, are forecast to be 20 per cent lower than two years ago because of the equity issuance that was needed to boost capital coffers.
The pay distortion isn’t a Goldman flaw, it’s an industry flaw. And in this way, it makes sense for the 800-pound gorilla of investment banking to be a thought leader. Paying less and keeping more will not just boost EPS and the share price – but the other gauges, such as ROE, that Goldman wants investors to focus on too. Regulators may not sign off on a special dividend this year, but those retained earnings could be distributed to shareholders at some later date.
Politicians, regulators and taxpayers have been waving the pay flag in a populist reaction to the financial crisis. Bank shareholders also have a legitimate claim. It’s high time they not just entered the debate but led it.
