Goldman, Executive Compensation, and Charitable Contributions (Part 1)

With the end of the calendar year, financial institutions total up their profits and decide on the year end bonuses.  The market is girding for record numbers, with banks doling out huge bonuses in the middle of a brutal recession. 

The financial institutions could pay less in bonuses but they won't.  They are nonetheless aware that the amounts will generate enormous outcry and criticism.  Some financial institutions don't care and will try to ride out the criticism.  Others are worried and are seeking to mitigate the effects.  Goldman Sachs fits into this latter category.

Goldman has little choice.  In 2008, 953 employees were paid more than $1 million.  Amounts in 2009 are likely to be even higher.  It has been and will continue to be the poster child for excessive compensation.  The fact that Goldman received bailout funds (since repaid) doesn't help.

Goldman has already taken some steps.  In late 2009, officials visited with shareholders to discuss compensation practices and apparently got an earful.  The financial institution reacted by agreeing to convert the bonuses paid to the members of its executive committee (30 officials) from cash to stock.  The change was designed to provide a compensation package that provided long term rather than short term incentives.  It was a small but noticeable change.  I discussed these changes on MSNBC.  But the shift in the type of compensation didn't alter the huge amounts scheduled to be paid.

The latest effort by Goldman to ameliorate the criticism is apparently to require top officers and managers to donate a certain percentage of their compensation to charity.  As the NYT noted:

• While the details of the latest charity initiative are still under discussion, the firm’s executives have been looking at expanding their current charitable requirements for months and trying to understand whether such gestures would damp public anger over pay, according to a person familiar with the matter who did not want to be identified because of the delicacy of the pay issue.

Apparently Bear Stearns had done something similar in the past, requiring the top 1000 employees to contribute 4% of their compensation to charity. 

The specifics have apparently not yet been determined.  Nonetheless, unlike the stock bonuses, the approach effectively reduces the amount of compensation paid to each employee.  

Goldman could have considered reducing the amounts paid in compensation and contributed the saved amounts directly to charity.  The financial institution in fact added an additional $200 million to its charitable foundation.  But making direct contributions would have potentially violated state law. 

Corporations are obligated to profit maximize.  Some portion of the company's profits can be donated to charity.   Companies may do so, however, only if there is a business benefit.  See RMBCA § 3.02(15)(permitting "donations, or do any other act, not inconsistent with law, that furthers the business and affairs of the corporation.").  For modest amounts of contributions, the business benefit can be vague, with enhanced reputation in the community enough of a justification. 

For more significant amounts, however, there must be a sufficient nexus to the business of the company.  Had Goldman chosen to donate 5% of the amount left aside for compensation, an amount that would probably exceed $1 billion, it would have needed to show some type of meaningful connection to its business.   Any failure to do so would likely generate lawsuits from shareholders alleging that the board had failed to engage in the required profit maximization.  

By giving the funds to employees but requiring them to make charitable contributions, Goldman likely ducks the legal issue.  Charities will receive the same amount but employees get to decide the charities and get to receive the appropriate tax benefits.  Moreover, employees obtain the psychic benefits that come with the contributions.  In other words, while they cannot spend the funds on their own needs, they nonetheless benefit from the payments. 

The Goldman approach does establish that employees could be paid less (their compensation less the amount required to be given to charity).  It is not far from an admission that the company is overpaying employees.  Moreover, it is nothing permanent; the practice could be discontinued at any time.  Finally, the approach will likely result in only modest reductions in compensation (Bear Stearns required contributions of 4%). 

The Goldman approach may be a modest improvement (assuming the final plan is a meaningful one) but it is likely to be too little, too late.  A comprehensive federal solution is still necessary.