Goldman Sachs Group Inc. (NYSE: GS) has long been a bastion of risk taking. Now though, with the advent of the Dodd Frank legislation and general aversion to risk by investors the firm is struggling to take on a new position – one that can continue to produce profits, while decentivizing risk.
On Wall Street, the easiest way to influence behavior is through the compensation plans, and that is what Goldman has in store. 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.
In the recent past, Goldman has been heavily criticizes for it’s risk-taking attitude. The company designed mortgage-backed instruments, which later became toxic and gained billions by betting against them. The firm, along with other major banks including JPMorgan Chase & Co. (NYSE: JPM), Citigroup (NYSE: C), and Bank of America (NYSE: BAC) were forced to accept government bailouts following their losses and widening credit default spreads. The new view of risk at Goldman may reshape the firm, if it becomes engrained in the firm’s long run culture and not simply a short term reaction to the public outcry.
