Home Markets Goldman Sachs just stripped $167 million of pay from executives caught up...

Goldman Sachs just stripped $167 million of pay from executives caught up in a massive Malaysian bribery scheme through something called a “clawback.” Here's what it is — and why it's not even a…

5
investorsdiurnal business news magazine

This post was originally published on this site

Lloyd Blankfein

  • Goldman Sachs Board of Directors announced Thursday that the CEO, CFO, COO, and CEO of Goldman Sachs International will collectively have their 2020 pay reduced by $31 million in light of a Malaysian bribery scandal.
  • If that $31 million is split evenly amongst the execs, that’s under $8 million per person. Last year, the top five highest paid executives at Goldman Sachs earned an average of $17 million in total reported compensation.
  • Former employees and executives, including former CEO Lloyd Blankfein, will also have to pay back a collective total of $67 million, according to the press release
  • In each of current CEO David Solomon and former CEO Lloyd Blankfein’s most recent three years at Goldman Sachs, they each earned a sum of more than $60 million total in total reported compensation. 
  • Visit Business Insider’s homepage for more stories.

Goldman Sachs has been under investigation for close to a decade over its role in Malaysia’s 1MDB corruption scandal. That ended on Thursday, when US Justice Department and regulators announced a $2.9 billion settlement and the bank admitted it broke US corruption laws. 

Goldman’s board also said it would take back or cut pay for former and existing execs at the prestigious Wall Street bank. 

Goldman’s announcement includes what is called a “clawback” in which executives, former executives, and former employees will give back some of their former compensation, according to the statement. The forfeitures, clawbacks, and reductions in compensation will amount to $174 million in total.

Federal prosecutors in 2017 filed criminal charges against Roger Ng and Tim Leissner, two former Goldman employees, of taking part in facilitating the theft of $2.6 billion from 1MDB, after Goldman had assisted the fund in raising more than $6 billion in 2012 and 2013. Leissner has pleaded guilty and is awaiting sentencing, while Ng has maintained his innocence and is awaiting trial. 

The recoupment of employee pay, or “clawbacks,” are a mechanism that allows firms to take money back from employees in the case of misconduct. 

US federal law currently only covers misconduct by CEOs and CFOs, so Goldman’s clawback in this case is self-imposed. Like many public companies today, Goldman Sachs has broader internal clawback policies that cover compensation recovery from a broader group of employees.

Goldman’s statement noted that “while none of the past or current members of senior management were involved in or aware of the Firm’s participation in any illicit activity at the time the Firm arranged the bond transactions, the Board has determined that it is appropriate in light of the findings of the government and regulatory investigations and the magnitude of the total 1MDB settlement that compensation for certain past and current members of senior management be impacted.”

In light of the recoupment of pay, the money the executives are giving back still only represents a fraction of what they’ve earned as employees of Goldman Sachs. 

The clawbacks cover many Goldman Sachs employees and former employees

A “clawback” is when a firm takes back money from employees in light of restatements on earnings or misconduct. Most firms today, including Goldman Sachs, have clawback policies written into compensation plans or employment agreements. Goldman in 2019 said it would look to cut pay and claw back money from current and former senior management. 

The firm is seeking $76 million total from former employees Tim Leissner, Ng Chong Hwa, and Andrea Vella, all listed by the firm as individuals “implicated in the criminal scheme.” Vella has not been charged but was permanently banned from the industry by the Federal Reserve.

Former executives, including the former Chief Executive Officer, Lloyd Blankfein, the former Chief Operating Officer, Gary Cohn, a former Chief Financial Officer, David Viniar, the former Vice Chairman who was a CEO of Goldman Sachs International Michael Sherwood and the former Vice Chairman who was the Global Head of Growth Markets Michael Evans will together forfeit outstanding long-term equity awards from a 2011 grant, in amounts totalling $67 million. 

Finally, the board statement said that current executive officers, named as CEO David Solomon, CFO Stephen Scherr, COO John Waldron, and CEO of Goldman Sachs International Richard Gnodde, will have their overall compensation reduced by $31 million for 2020.

Goldman Sachs’ clawback policy

Goldman Sachs adopted a clawback policy in 2015, allowing the bank to recover compensation from the executive leadership team that “mitigates imprudent risk-taking, including that misconduct or improper risk analysis.”

Current laws from the Sarbanes-Oxley Act in 2002 don’t require clawback policies at firms, but allow companies to recoup compensation paid to the CEO and CFO if the company had to restate earnings or if there was misconduct.

However, according to Steve Seelig, senior regulatory advisor at Willis Towers Watson, “shareholder advisory firms [insist] that companies have their own enforcement mechanism, so that corporate clawbacks for fraud [are] enforced by companies,” so many companies have clawback policies in place. 

Goldman Sachs’ full proxy disclosure surrounding clawbacks is below. : 

“Our Compensation Committee adopted a comprehensive, standalone clawback policy in January 2015 that applies to each member of our Executive Leadership Team and generally permits recovery of awards (including equity-based awards and underlying Shares at Risk).

Among other things, the Clawback Policy expands our Recapture rights if the events covered by The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) occur, applying such provision to all variable compensation (whether cash- or equity-based) paid to any member of our Executive Leadership Team, even though the Sarbanes-Oxley provision on which it is based requires that such a clawback apply only to our CEO and CFO.”

The compensation and share ownership of Goldman Sach’s CEO and former CEO, David Solomon and Lloyd Blankfein

The executives, both current and former, will be losing a lot of money. That’s what clawback policies are meant to do — recoup payment that shouldn’t have been awarded to executives in the first place. 

But for firms like Goldman Sachs, a few million dollars represents a fraction of what executives are earning annually. Let’s look at both the current and former CEO, David Solomon and Lloyd Blankfein.

From 2017 to 2019, current Goldman Sachs CEO David Solomon earned a sum of total reported compensation equaling $61.7 million. Aside from this, Solomon owns 163,754 shares of Goldman Sach’s stock, worth a total of $33.6 million as of Thursday’s close price. That’s almost $100 million over the past three years. None of this money is being recouped, as the settlement only impacts Solomon’s 2020 compensation. 

In his last three years at Goldman Sachs, 2016-2018, former CEO Lloyd Blankfein earned a sum of total reported compensation equaling $65.6 million. As of March 4, 2019, Blankfein also held 2,393,130 shares of Goldman Sachs stock. It’s unclear how many shares Blankfein holds today, as Goldman Sachs’ beneficial ownership disclosure only includes the ownership of current directors and named executive officers. But the value of 2,393,130 as of Thursday’s close price would have been nearly $492 million. 

The chart below shows the compensation for Solomon and Blankfein over the most recent four years. Note that, in 2017, Solomon was a co-COO. In 2019, Blankfein no longer was employed by Goldman Sachs.