Compensation packages and their organizational impact

Morgan Stanley & Goldman Sachs

Employee compensations has for many years been seen as a type of job benefit package that did one of two things: either reward people for doing good work (merit) or offer them the chance to make more by coming up with creative new business ideas that made the company money (incentives) (Tropman, 2001). Now, however, the issue has changed on a number of fronts. For most companies, the development of menu-based benefit packages have allowed employees -- mostly management employees -- to basically choose from a variety of ways to be rewarded for their work. This remains the practice today for the majority of companies. But for some companies that rely on either technologically or otherwise highly competent people who can work well in a global setting, the issue becomes more about equity -- how well does what they make reflect the value of what they bring to a company (Tropman, 2001:11-12).

In February 2010, the Squam Lake Working Group of the Council on Foreign Relations prepared a working paper on the Regulation of Executive Compensation in Financial Services (Greenberg, 2010). Their job to was to assess why it was that the equity issue of corporate pay for middle and top management got so out of balance in about 2008 and 2009 when it became known how much money executives of some of the leading financial institutions in the U.S. were making even as their companies required tax-payer bailout support.

In their assessment they offered a look at the conditions that could well exist for some top financial employees. When big dollar decisions are being made, accuracy and knowledge are worth a great deal: "An extra 1% return on a $10 billion investment portfolio adds $100 million to a firm's earnings. An investment banker who structures a transaction incorrectly can quickly transform a large acquisition from a brilliant idea to a $200 billion albatross" (Greenberg, 2010:2).

Even more specifically, they identified three main reasons why it is that companies in this sector find that they must pay top dollar for certain people (Greenberg, 2010:3-4). The first reason was the basis for the quote: there are real reasons why some people are worth more than others. The other reasons include the common belief that human resource people in these fields believe that they can identify well who will perform. In addition, it is often the case that those who do perform well have the ability to move from one company to another -- and with large salaries and compensation packages, they can often encourage their other team members to make the change with them. This instability was thought to make companies want to give employees a lot upfront.

For the most part these conditions have not changed. This is why many companies will find that they are still in the position where they may have to still make big payments to some executives even when they are under suspicion (AP, 2012). But even in saying this, the Squam group and others are not suggesting that nothing needs to change; just the opposite actually. In fact, significant recommendations have been made to try to address these concerns and even to try to ensure that some people who benefited (unjustly) in the past cannot be rewarded again for what turned out to be poor decisions. At the end of this work a brief overview of some of these suggestions is offered.

But is change really happening? Are the companies that were most involved listening or reacting to what is being reviewed and suggested? It appears that some are and some are not. Morgan Stanley and Goldman Sachs have undertaken far different approaches which can be seen in their materials and in what the media is saying.

MORGAN STANLEY AND GOLDMAN SACHS

A look at the management and compensation packages of Morgan Stanley and Goldman Sachs suggests that if change is happening it does not appear to be as broad-based. It also does not appear that the U.S. government or its institutions that basically owned portions of these businesses during the economic struggle did much to try to address the issue of top-management compensation. Some of this comes from what might be conflicts of interest in the field and others just come from the fact that changes that companies like Morgan Stanley are making will take time to play out.

Morgan Stanley

Morgan Stanley is one of the world's largest financial institutions. It offers a massive array of services. Here is how Hoovers, a respected online investment resource group, describes MS's operations:

The company operates in three primary business segments: institutional securities (capital raising, corporate lending, financial advisory services for corporate and institutional investors); global wealth management group (brokerage and investment advisory services, financial planning for individual investors and businesses); and asset management (services and products including alternative investments, equity, fixed income; merchant banking; investment activities). Morgan Stanley has more than 1,300 office in more than 40 nations serving corporate, institutional, government, and individual clients (Hoovers MS, 2012).

In a 2009 compensation report, which followed closely on the heels of a bailout by the U.S. government, the company produced a report on its compensation guidelines (Morgan Stanley, 2009). After noting how its CEO had received no bonuses, as was true for lower top management as well, they identified six controlling factors that they say are of paramount importance when they consider compensation. These factors include making sure that decisions in this regard are driven by both company and personal overall performance, their desire to balance long- and short-term objectives, contributions needed to keep key talent that is already with the company, avoiding unnecessary risk taking, aligning company and shareholder interests, and what the market bears in securing new talent (Morgan Stanley, 2009:4).

What MS means by these is explained through their document. Basically, however, they believe that have undertaken important shifts of emphasis. For example, the longer employees stay in top jobs, the more their payouts are tied to long-term components. This is thought to discourage them from leaving immediately while encouraging them to continue working to substantially benefit the business as a whole. The company added certain types of "clawback" provisions as well that would allow it to take back certain payout benefits under the conditions that it was shown that employees earned their benefits from inappropriate activities. Other directives have been created that require individual executives who are involved in stakeholder interest committees inside of MS to retain as much as 75% of what they are given for as long as they are involved in these working groups. This is seen as a way of ensuring that they do not sell away their interests when tough operational decisions are being made. In the section on benefits for other employees below, it is also noted how they have shifted their stock payments for other performance outcomes (Morgan Stanley, 2009:7).

In an interesting sign of the nature of the sector, the Journal of Applied Corporate Finance issued its own report on executive compensation in 2010 (Faulkender et al., 2010). This work sought to look back on specific practices and then to look forward to what changes were needed. While their recommendations will be reviewed later, what is most important to recognize that this piece is "A Morgan Stanley Publication." It doesn't refer in the article to MS nor to the changes MS says are so important. Presumably, it seeks to distance itself by looking more objectively at the sector as a whole. Still, one of their opening comments says: "Many observers believe that top-level executive compensation is not sufficiently linked to long-term corporate performance (Faulkender et al., 2010:107). This seems to be exactly what the company is doing and does, as a result, seem to be rather self-promoting.

Goldman Sachs

In a similar, highly positive offering, Hoovers again suggests the exceptional status of this company above others in the field:

Goldman Sachs has traditionally possessed the Midas touch in the investment banking world. A global leader in mergers and acquisitions advice and securities underwriting, Goldman offers a gamut of investment banking and asset management services to corporate and government clients worldwide, as well as institutional and individual investors. It owns Goldman Sachs Execution & Clearing, one of the largest market makers on the NYSE and a leading market maker for fixed income products, currencies, and commodities. Through affiliates GS Capital Partners, GS Mezzanine Partners, and others, Goldman Sachs is also one of the largest private equity investors in the world (Hoovers, GS, 2012).

What is noteworthy about the company as a whole after its economic collapse, however, is the fact that what it is doing now ended up not in a professional report, like Morgan Stanley prepared, but on the opinion page of The New York Times, written by a former top-level investor and talent recruiter (Smith, 2012). He reviews how the company has changed in relation to what its leadership thinks. Greg Smith, who worked for the company for nearly 12 years, says the key issue is leadership and their desire for making more and more money at all costs:

How did we get here? The firm changed the way it thought about leadership. 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.