Ordinary shareholders of Goldman Sachs should be worried about the Wall Street Journal report that major shareholders of Goldman Sachs have been putting pressure on the firm to cut down on its compensation.
The Journal didn’t explain who these major shareholders might be. But we can imagine they are professional money managers whose interests diverge markedly from retail investors in the investment bank.
Individual investors who are saving for retirement often plan to hold stock for the long haul. And over the time that Goldman has been a public company, its shares have seen annualized total returns of better than 10% while the S&P has actually contracted slightly. In short, Goldman has been a decent long term bet.
Professional money managers often have far shorter term gains in mind. For any given company, they often want to maximise current returns over long term gains. They can seek long term gains by serial exploitation of companies that are sold once they have been depleted of short-term opportunities.
Goldman is heavily owned by institutional investors, so this divergence has long been a danger to individual investors. This is actually one reason that individuals investors should try to avoid picking stocks.
But media reports of resistance to Goldman’s high levels of compensation may be too gullibly accepting the pleading of special interest professional money managers who would love to include a “special dividend” in their investment earnings, even if that was not in the long term interest of keeping Goldman a healthy company.
Goldman’s returns, which have consistently beat its Wall Street rivals, are probably not possible without outsized compensation. The highly compensated individuals would simply find elsewhere to work. Lower paid junior staffers might also flee to rivals, where the work climate is often more relaxed than the “all Goldman, all the time” grind at 85 Broad Street.