Goldman To Play Down Risk Taking - Analyst Blog

To discourage the employees inherent attitude of taking excessive risk, Goldman Sachs Group Inc. (GS) has devised a new compensation plan. According to a regulatory filing made by the company last week, this incentive plan, which supplements its current compensation programs, will reward the key employees for their contribution to the long-term performance goals.

However, the company would take back or cancel all or a part of the award in situations where the employee violates company rules and engages in unfavorable conduct, in materially improper risk analysis or fails to highlight the concerned risks.

The new incentive plan, which was approved by Goldman's board on December 17 will reward key employees time to time with bonuses that would be linked to Goldman's return on equity, total shareholder return, market price of its common stock or the market price, face amount or discounted value of other debt or equity securities; book value per share; earnings per share; net income; pre-tax operating income; net revenues or pre-tax earnings.

Goldman's chief risk officer who was involved in designing the new incentive policy is expected to review the key terms of any awards under the plan. Employees may be rewarded with cash awards, equity-based awards and/or other securities of the company. Goldman has devised such an incentive compensation plan in order to make it a more balanced and in sync with the company's soundness and safety. This is also consistent with the financial regulations passed in summer this year that aiming at reducing  the excessive risk-taking attitudes of the employees by blocking their compensation plans laden with such attitude.

Goldman's risk-taking attitude had been highly criticized in the past. The company designed mortgage-backed instruments, which later became toxic and gained billions by betting against them. The company along with other well known biggies such as Bank of America Corporation (BAC), Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) had to resort to government bailouts.

Wall Street companies have witnessed public outcry while paying out hefty bonuses at a time when their excessive risk-taking practices contributed to the crisis. As a result, the regulators are now adopting strict approaches to check such practices and therefore we remain hopeful for a better and efficient financial system in future.