Idea for banks: Cut bonuses, help shareholders

Large banks need to wake up and act responsibly with respect to bonuses. Shareholders will benefit.

By Jamie Dlugosch Jan 21, 2010 5:38PM

In the government vs. Wall Street vs. taxpayer uproar over big bank bonuses -- and now over the president's plan to rein in the banks -- one group doesn’t seem to get much attention:

 

The shareholders, who lost tons of money in the financial meltdown.

 

From this angle, the story isn't about populism or class warfare. It's about the owners of these companies wanting to maximize profits to rebuild share prices.

 

Case in point: Goldman Sachs' earnings report, released today, contained a surprisingly large profit, in part because it trimmed expected bonuses. (I prefer these 10 stocks without crazy bonuses this year.)

 

Yes, Goldman share went down on the day as a result of President Obama's bank-reform package. But ultimately, unless the investing rules have totally been thrown out, higher profits will ultimately mean higher stock prices.

 

Initially, many believed that Goldman was on tract to deliver bonuses in excess of $20 billion, no small amount. But that number shrunk to $16.2 billion under the heat and scrutiny of a public dissatisfied with the taxpayer-funded rescue of Wall Street.

 

The self-regulation with respect to pay helped Goldman to a profit of $8.20 per share, far in excess of the analyst estimate of $5.20 per share.

 

And it would be nice to see the big bankers worried about shareholders instead of their own bonuses.

 

It is, after all, the shareholders that risk the capital enables Goldman and its employees -- and the other Wall Street banks -- to conduct business. Those employees are hardly underpaid.

 

My question is, why did it take management so long to come to this realization that lower pay results in higher profits? And will other banks follow this course?

 

Morgan Stanley's earnings, for example, were weak -- but its bonus pool was strong. Did it really make sense to set aside some $14 billion for bonuses at a time when the company was posting its first annual loss in its 70-plus year history?

 

It does seem like the larger banks are all taking it on the chin. Citigroup (C), Wells Fargo (WFC) and Bank of America (BAC) all posted huge losses in the current period. Pay was strong, though.

 

Boards of directors should be held accountable here if they fail to maximize shareholder value. After all, the stocks of all these companies, including Goldman, remain well below their pre-meltdown levels. The priority should be working to get shareholders' money back.

 

That's how public companies work. It's why we all feel safe investing (or used to.)

 

In the absence of responsible boards, the government will indeed step in.

 

It is high time the banks change their ways with respect to compensation. Don’t do it to satisfy a populist movement or dismiss it as class warfare. Do it for your shareholders. (Click here for a free copy of MainStreet's Top Stocks for 2010)

 

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