Blankfein Speaks Out On Executive Compensation. Better Late Than Never.

In the April 8, issue of The Wall Street Journal, Aaron Lucchetti reported on a speech given to The Council of Institutional Investors by Goldman Sach’s Chairman and Chief Executive Lloyd Blankfein. Mr. Blankfein called for major changes in how Wall Street executives get compensated. He recommended that banks and securities firms compensate senior people mostly with stock and restrict sales for at least three years. This strategy will tie the interest of these executives with the long-term interests of the firm as the stock price reflects the success of the company. In addition, executives will not be able to take advantage of any short-term moves in the stock. This should rein in excessive risk-taking. He said that Wall Street needs to do a “better job of understanding when incentives begin to work against the social good.” We should not overly compensate executives when times are good and especially during times of losses. You would think that this would be common sense. It is shocking to think that Mr. Blankfein who is in charge of one of the most successful financial companies in the world would even have to mention these principles. However, as I said, better late than never.

This is the third article I have devoted to executive compensation since I believe it is vitally important that we get this right. Our capitalistic system is predicated on incentives. People will usually do what is in their best interest. When short-term performance is emphasized, that will be the result. If there is little penalty and great rewards for taking risk, guess what, great risks will be undertaken. This is not rocket science.

I was listening to Ben Bernanke, the Chairman of the FRB give a presentation to the students at Morehouse College yesterday. One of the things he mentioned was apropos to executive compensation. He said that money should not be the motivating force behind looking for an appropriate career. Certainly, good advice for college grads entering the work force. However, I think this is also good advice for companies looking to build a good corporate culture. If compensation is the primary carrot being offered to job candidates, you’re going to get applicants that are just interested in making money. Unfortunately, this may attract unscrupulous people in their quest for wealth.

Voila, we have now covered the primary reasons for our financial mess. Our major financial institutions attracted executives, some of whom were unscrupulous, whose primary interest was making money. Furthermore, these executives were heavily compensated for taking short-term risks without commensurate penalties for poor performance that affected long-term success.