We understand why you are deeply concerned about how to pay Goldman Sachs executives and employees this year. Your firm has made a tremendous amount of money, in large part because it is able to borrow cheaply due to the implicit Too Big To Fail guarantee from the US government. You took tens of billions of taxpayer dollars, which may have brought your firm back from the edge of extinction last fall. And you’ve been subject to some of the worst press imaginable.
It has to be tempting to just call the whole thing off. You probably wish you could just send a secret memo around to your employees assuring them that while they won’t make money this year, the firm will save it up for next year, after the storm of populism has passed. We all know that won’t work. Other firms will scoop in and poach your best talent. And who is to say for sure the populist outrage won’t stretch out for years and years?
At some point, you are going to have to face the basic fact that employees who bring in billions of profits to a firm–regardless of whether those profits stem, in part, from a government subsidy–are going to demand their fair share of the profits. The only way of determining the size of the “fair share” is by looking at the market, which tells us that this is about 50% of revenues. There’s no Platonic ideal of Fair Pay, regardless of what the principles of the Pay Czar might say.
Who else should get the money? Shareholders? That’s one possibility but it doesn’t really make sense. They are just as much beneficiaries of the bailout as employees. Increasing their take doesn’t do anything to address the problem of privatized profits and socialized gains. Creditors? You could pay off your debt, but there would be severe tax penalties and the same analysis applies: they too are already benefiting from the implicit government guarantee. In any case, both shareholders and creditors would ultimately lose if the best talent left your firm.
The worst idea would be to somehow give the money to the government in the name of rewarding the taxpayers for their investment in your firm. In the first place, you’ve already made good on the deal you cut with the government. Second, and more importantly, not one single taxpayer would see a dime. Instead, politicians would waste the money on their pet projects. Government revenue does not translate into taxpayer benefit. Often quite the opposite is true. Third, the size of your contribution to the US Treasury would be so dwarfed by the total government deficit that it would count for almost nothing.
You shouldn’t attempt to do anything fancy. Don’t move the compensation from bonus to salary, don’t hide behind stock awards, don’t do a share buyback that enriches your executives. All of these moves will be instantly seen for what they are: attempt to obscure the amount you are paying your people. This would be fodder for the anti-Goldman conspiracy theorists, who would say that the sly fox of Goldman was getting at the hens again.
Here’s the thing about being clever: it makes you look guilty. Dogs chase people who run from them because running seems like a confession of guilt. Police do the same thing. If you run from this, you will only embolden your critics.
There’s just one alternative that works: pay the bonsues. That’s right. What you need to do is operate as if you are doing nothing wrong. Because you are not. You should issue a press release that tells the American people that you are glad to participate in the great recovery of the American economy, you are pleased to have so greatly benefited your shareholders, and confident that Americans maintain their faith in the free market. Tell your critics in the press the truth: people who earn money deserve to get paid for it. That’s true even if they’ve earned a lot of money and get paid a lot of money.
Thomas Jefferson opposed the politicalization of banking embodied in the national bank favoured by Alexander Hamilton. By resisting the poltiical demand that you lower compensation, you are participating in this Jeffersonian tradition. Don’t let the central bankers and the US Treasury boss you around.
To soften the public relations blow we have a proposal. Donate 10 per cent of your $11 billion bonus pool to charity. This will amount to a 10% paycut across the board, which won’t make you too vulnerable to the poachers. It will, however, make Goldman responsible for one of the top 10 largest charitable donations in the history of the United States. You will be the most generous company on earth. And this, really, is a better way of repaying the American taxpayer than putting more money into the hands of politicians and bureaucrats.
We’re free market enough to want to see the government back out of the business of implicit guarantees of Too Big To Fail banks. If that is how politicians react to your bonus payments–stripping you of bank holding company status, taking away your access to the Fed–all the better. You’ll be better off, as long as similar penalties apply to others. And the markets will operate more effeciently. In fact, you’ll have done a great service by restoring the role of market processes in our banking system.
It’s a simple message, Lloyd. Pay your men and women. That’s the American way.
John Carney & Joseph Weisenthal,
Editors, BusinessInsider.com, Clusterstock/Money Game
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