Research Paper: Morgan Stanley &amp Goldman Sachs

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[. . .] Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence. (Smith, 2012).

At about the same time as this editorial dig, the company itself released a compensation assessment. This document reviews the organizational structure of its compensation committee and then reviews how these decisions are overseen (Goldman Sachs, 2012). In addition, it notes that there are two guiding principles that it follows:

By providing a sizeable portion of variable compensation to senior employees in equity-based awards that are restricted over an extended period of time and subject to "clawback," GS encourages a long-term, firm-wide approach to performance

By tying compensation to performance, GS incentivizes employees to create long-term value for our shareholders (Goldman Sachs, 2012).

Other media stories were also not very kind to GS (AP, 2012). Noting how a 47% drop in revenues in the last year, which included one quarter where the company actually lost money, it questioned the appropriateness of six years of bonuses to its CEO. In 2011, Lloyd Blankfein's perk amounted to a 14% over the previous year. The company also still remains under strict scrutiny and its CEO has been personally named in a settlement of $22 million for sharing inappropriate confidential information with some of its clients (AP, 2012). In what way, one might ask, does this recent bonus reflect change at all?

COMPENSATION FOR OTHER EMPLOYEES

Talking about top managers is often what happens on this topic because of the way these individuals seem to represent their company cultures. But other managers also receive variable pay that is tied to their performances and to the trend toward offering menus of services. What is available on the Internet includes among other things salary ranges for their main financial advisors. A short review is provided here. Take note of how GS and MS differ.

Goldman Sachs is said to pay between $44,219 and $90,000 for these positions, with bonuses of between $2,000 and $86,000, as well as profit disbursements of from about $799 to $6,000 (PayScale GS, 2012). The same online posting company lists this position for Morgan Stanley as getting a base pay from $30,000 to $108,000 (PayScale MS, 2012). Their bonuses range from $2,959 to about $50,000, which is lower than Goldman's. However, their profit disbursements can be up to about $19,000. Investment bankers or IT professionals in these companies can often make even more money through direct pay or their own incentives. Information is not provided on these sites for year-to-year changes.

Morgan Stanley's 2009 look at the issue based on what it has done recently in changing their work environment is worth noting (Morgan Stanley, 2009). One of their most impressive elements is its performance-based stock option. Rewards of these benefits are based on how the company as a whole does over a three-year period. If the company gets its goals, bonuses are paid. If the company does not achieve those goals, than all of the senior executives will forfeit their entire stock reward. Even this is further modified by how well various types of stocks do for its investors and stakeholders, including how much ownership is still vested in the hands of the U.S. government from its bailout support. Care still has to be observed, however. Other assessments have noted that "Pay-for-performance sensitivity has significantly increased over time, improving the alignment of CEOs with shareholders, but also appears to have had unintended consequences" (Morgan Stanley, 2009:7). Still, unlike Goldman Sachs, they do seem to be trying to change.

RECOMMENDED IMPROVEMENTS

Clearly much of what happens in regard to payments made to individuals is confidential. As such it is not always clear what might be happening at the lower levels. It is interesting to note how the public information about Goldman Sachs does seem to reflect the same tone that is offered in the New York Times opinion piece by one of their employees. Here is what Smith says as he leaves Goldman Sachs, suggesting what he thinks has to be done:

Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm -- or the trust of its clients -- for very much longer (Smith, 2012).

As has been noted before, other reviewers have also made suggestions as to how to address the problems. The Squam recommendations believe that the government cannot solve this problem by directly trying to manage compensation rates or considerations. However, it can undertake other incentive directives that would encourage companies to do as both Morgan Stanley and Goldman Sachs say they do, tie their payments to longer term employment with the companies so individuals cannot be rewarded until time shows that their approaches worked. This would allow "clawback" guidelines to work too so that investors or the government can get back its money if it turns out that the businesses used poor or improper business practices to make excessive profits (Goldberg, 2010).

The suggestions of the Journal of Applied Corporate Finance, which is a Morgan Stanley publication, are somewhat different (Faulkender et al., 2010). They believe that certain IRS and other regulations favor certain payouts over others. Addressing these changes would be an incentive for companies to look at how to make new types of reward system. They also favor stronger clawback provisions. Most interestingly, they suggest that some institutions, like banks, are different types of businesses and may need their own payment rules. But this would only work if the public was given more information about how those decisions were actually made and implements -- a good suggestion in general and a great one coming from a publication of Morgan Stanley that cannot help be being somewhat biased toward its own interests!

REFERENCES

AP (2012). Lloyd Blankfein, Goldman Sachs CEO's Pay Increased 14% to $16.1 Million in 2011. Huffington Post. Viewable at http://www.huffingtonpost.com/2012/04/13/goldman-sachs-ceo-lloyd-blankfein-16-million_n_1423848.html.

Faulkender, M. et al. (2010). Executive Compensation: An overview of research on corporate practices and proposed reforms. Journal of Applied Corporate Finance. Vol. 22, No. 1.

Goldman Sachs (2012). Compensation. Board Document. Viewable at Greenberg, M. (2010). Regulation of Executive Compensation in Financial Services. Working Group. Council of Foreign Relations.

Hoovers GS (2012). Hoovers Goldman Sachs. http://www.hoovers.com/company/The_Goldman_Sachs_Group_Inc/cfrkji-1.html.

Hoovers MS (2012). Hoovers Morgan Stanley. http://www.hoovers.com/company/Morgan_Stanley/rhskif-1.html.

Morgan Stanley (2009). 2009 Compensation Report: Adapting Employee Compensation to the Current Environment. Viewable at PayScale GS (2012). PayScale Goldman Sachs. Viewable at http://www.payscale.com/research/U.S./Employer=The_Goldman_Sachs_Group,_Inc./Salary.

PayScale MS (2012). PayScale Morgan Stanley. Viewable at http://www.payscale.com/research/U.S./Employer=Morgan_Stanley/Salary.

Smith, G. (2012). Why I am leaving Goldman Sachs. The Opinion Pages. The New York Times. Viewable at http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?_r=2&ref=general&src=me&pagewanted=all.

Tropman (2001). Old pay to total compensation. Chapter 1. Retrievable from http://media.wiley.com/product_data/excerpt/12/07879540/0787954012-1.pdf. [END OF PREVIEW]

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