Bill George, a board member of Goldman Sachs, on the changing landscape of Wall Street bonuses in the wake of the economic crisis—and why government intervention is more harm than help.

Question: There was a report that shareholders were angry that such a large portion of Goldman’s profits were going to employee bonuses. As a board member, where do you stand? (Dan Indiviglio, the Atlantic Business Channel)

Bill George:  I’m very concerned about the compensation issues and the public’s reaction to that.  I frankly think that the public perception is a much bigger issue than the shareholder issue.  I think that is a limited group of shareholders.  Shareholders seem to be quite pleased with Goldman and there is a linkage between pay and performance and I think as long as we follow our principles of long term pay for long term performance then the firm is going to do well.  If it gets back to play, if it goes to a short term game like Citigroup did of paying out large cash bonuses I think that would be a disaster and I don’t think you’ll see that happening.  There is always a question of the amount and I think one has to look at that in relationship to the profits and I think you’ll see even that percentage coming down.  It’s been very high on Wall Street, much higher than any industrial corporation that I know of, but I think those percentages need to be re-looked at and I know the Goldman board and compensation committee in particular are taking a hard look at that right now. 

Question: How does this pay reflect real value added to the real economy?

Bill George:  One of the statements at Medtronic mission is that employees should have a means to share in the company’s success and to me that meant a lot more than salary or wages and benefits and so what we tried to do at Medtronic was to spread the wealth around.  When the company is successful everyone got stock.  In fact, we made sure every employee had stock.  Now it was in a restricted plan, but still, everyone had stock because we wanted them to be the beneficiaries to the extent the stock went up they benefited and we gave out, converted a lot of profitability into stocks spread broadly across the company in stock options.  I was a beneficiary of that, but only because the shareholder value went from $1.27… went from 1.1 billion to 60 billion while I was there, so everyone else had a chance to benefit and I think that is the way it should be.  Now you can’t say in a firm like Goldman that they don’t do that.  I think just the numbers are so much larger on Wall Street and it’s not just Goldman and if you think they’re large on the publically held firms where you know all the numbers then look at what the hedge funds pay and you can just add a zero on that and one of the characteristics there is it is a fairly free market for traders.  I’m not saying that the top executives are going to move into hedge funds, but it’s a fairly free market for traders moving from publically held firms into privately held hedge funds and private equity and so this is one of the sensitive issues I think that one feels like the shareholder value is made up in people and you need the people there to do the job and if you don’t pay them for their performance you’ll lose them and It’s much like professional athletes and movie stars I think.  I can’t justify the relationship between a trader’s bonuses and what a school teacher makes for instance.  I think we have much societal issues.  It’s hard for me to justify that or what an athlete makes you know who plays basketball compared to what you know what a school teacher makes or even an engineer, so I worry about these a lot, but I haven’t figured out how to solve them either. 

I don’t buy the market efficiency argument.  I’ve heard that from The Economist for a couple of decades.  I don’t really buy that argument.  The argument I would buy is that we need strong financial institutions to finance business, to finance individuals and right now that is a huge problem.  The credit crunch may be over for big business and may be over for Wall Street, but it’s certainly not over for small business and individuals still having a lot of problems getting financing and I would be the first to say that financial institutions like Countrywide Financial and New Century Mortgage went way overboard in offering it to everyone in totally inappropriate ways, but I do think we depend upon strong financial institutions to facilitate the start up of business with venture capital, to facilitate the growth of business, small business and this is where the jobs come from.  70% of all jobs in this country are created by small business and most of those are newer companies.  My company started with two people and had it not been for some venture capital. Now admittedly it was only $200,000 in 1962, but it saved the company from going bankrupt and gave the company the wisdom and the focus to go forward, but I think I know lots and lots of young people that would like to start companies today and can’t get financing and don’t have a lot of money personally and I think that is the fuel behind the system, so now do you put that pay in proportion and does it payoff with hedge funds trying to say they’re providing efficiency when they make their money selling short?  I think that’s a stretch as an argument. 

Question: How does one go about determining how much the CEO of Goldman Sachs should get paid and has that changed in the wake of the crisis? (Felix Salmon, Reuters Finance)

Bill George:  Well I think this is a very tough question.  I think it’s got to be looked in relationship to peers and what they’re paid.  First it starts with performance.  Is the performance there?  Lloyd Blankfein and the top six members of management including Blankfein were the first company to take no bonuses last year in the top six, not just top person, took no bonuses because they felt it was a very rough year and they had had a lot of support getting through the year.  When they perform they should be paid.  Now how much that is I think it should be spread around at Goldman so it isn’t just the CEO getting the money.  I don’t like this idea the CEO is way up here and the executives are up here and everyone else is down here, so I think there has got to be a relationship internal, that internal equity and I think that amount that needs to be looked at in relationship to profitability, but I don’t think it should be paid out in cash.  I think it should be long term pay for long term performance.  If you payout for fourth quarter performance or one year performance and let people cash out you’re just creating more of the problem.  You’re asking people to get more fee based income to enrich themselves today and walk across the street to somebody else tomorrow.

Question: Should the government impose a fixed time frame on bonuses?

Bill George:  I think it’s very hard for the government to legislate compensation.  Every time they do there are unintended consequences.  A good example right now is Robert Benmosche.  The CEO of AIG is making 7.3 million dollars in a firm that is 80% owned by the U.S. government.  Is this right?  He is the highest salary of a publically held corporation in history.  Why are we doing this?  Just because of the Dodd Amendment you couldn’t pay more than 50% in bonus.  This is ridiculous.  You know the CEO at Goldman Sachs gets paid $600,000 salary, okay.  That’s more inline and I think you’ll see that people like Blankfein and others at Goldman, all the top group will take it all in long term stocks just like Paulson did.  Paulson never took any cash.  He took it out in stock, so if the firm does well he does well.  If the firm collapses they collapse and you know there was a lot of net worth loss in the fall of 2008 on the part of a lot of top people and some of them like JP Morgan and Morgan Stanley and Goldman Sachs bounced back and some of them like Lehman Brothers and Citigroup and Wachovia never came back and probably won’t.

Recorded on December 9, 2009