Introduction
One of the annual concerns of the company is its compensation policy or strategies. Compliance to the compensation policy and plans has remained to be a sensitive issue to most companies. The compliance requires that the firm board and chief executives exercise greater independence, judgment, as well as skills while implementing its compensation plans. The reason is that compensation plans are integral to the long-term performance of the company (Jensen, 1998).
In essence, the firm stakeholders will always provide support to the compensation plans that add sustainable value to the firm’s performance. Indeed, the importance of the compensation plans to the firm is underscored by the disclosure requirement of the SEC, which is more detailed than any other item in the proxy statements (Jensen, 1998). This paper will be analyzing the Goldman and Sachs Inc. compensation practices and the effects of laws, labour unions, and market forces on these compensation practices.
The company compensation strategy and compensation-related challenges they are facing
Goldman and Sachs is one of the leading investment banking in the world. The company also is a securities and investment management firm that offers a number of financial services to the diversified and substantial client base (Goldman Sachs Group Inc., 2010). The firm’s client base includes governments, institutions, as well as the high-net-worth personalities.
The company has adopted compensation framework designed to align with long-term interests of the people as well as all its shareholders. In addition, the compensation practices of the company are in accordance with the requirements of the regulatory bodies such as the Federal Reserve Board and the EU regulators (Goldman Sachs Group Inc., 2011. The company have strived to harmonize its compensation practices with those applied worldwide in order cater for the needs of all its stakeholders spread worldwide.
The firm’s compensation practices are aimed at attracting and retaining the best talents, supporting its greater performance, discourage excessive risk taking by its employees and support the interest of its employees as well as shareholders (Goldman Sachs Group Inc., 2011). Further, the firm’s compensation strategies are evaluated overtime to take into cognizance some of the changes that have taken place in addition to the compliance with the newly enacted laws and regulations.
One of the key practices is that there is necessary disclosure element in the firm’s compensation plans. Moreover, the compensations are based on the company financial performance. In other words, short-term compensations are discouraged particularly to avoid short period incentives that may benefit only the chief executives. In addition, the company allows claw-back provisions that necessitate performance based compensations (Goldman Sachs Group Inc., 2011).
The company compensation practices are in accordance with the requirement of the local laws and regulation as well as the regulations of the financial entities in the countries where the firm is operating. Complying with some of the regulations has remained to be the major challenge in the implementation of compensation plans by the company. There is a widespread pressure by employees as well as institutional regulators for appropriate compliance with the best practices of compensation (Goldman Sachs Group Inc., 2011).
How the company has applied its compensation practices
The firm compensation practices are aimed at attracting and retaining the best talent to the company. The firm believes that retaining and attracting the best talent is critical for the long-term success of the firm. Drawing from the experience, the best talent has remained the major firm competency hugely contributing to its relative outperformance.
In addition, the company directly aligns its firm-wide compensation with firm-wide performance (Goldman Sachs Group Inc., 2011). In essence, the firm only guarantees employment contracts under exceptional circumstances while avoiding multi-year contracts. Based on the firm’s performance, there is wide variability in the compensation of senior and highly paid people resulting on the year-to-year financial results.
Further, the firm evaluates its performance overtime. In most cases, the firm uses discretionary compensation awarded at the year-end. The percentage of compensation given out in cash normally decreases as the workers variable compensation increases (Goldman Sachs Group Inc., 2011). In addition, the equity-based compensations are subject to vesting as well as other restrictions within a specified period.
The restrictions put in place allows for the forfeiture in future periods. Besides, the company discourages concentrated or excessive risk taking (Goldman Sachs Group Inc., 2010). This form part of the individual yearly evaluation and as such, the company risks are taken into consideration before any compensation. However, compensation is not based on the percentage of revenues generated by particular individuals.
Lastly, the company compensation aligns the interest of both employees and shareholders. Employees are considered in similar platform with long-term shareholders (Goldman Sachs Group Inc., 2011). Significantly invested services and stocks in the company, as part of the company individual compensation, employees are allowed advances. This is in line with the company partnership culture of stewardship. In addition, the company compensation policy allows shareholders to have a say in or advice on the compensation principles.
Ways through which laws, labor unions, and market factors affect the company’s compensation practices
The company compensation practices are subjected to the oversight of different countries laws as well as other oversight boards such as the Federal Reserve Board. Moreover, other factors such as market needs determine the company compensation practices. However, the content and scope of the compensation regulations are continuously developing especially in the financial sector thus the company policies are also expected to evolve overtime (Goldman Sachs Group Inc., 2010).
Some of the legislations require that the financial regulators, Federal Reserve Board included, establishing joint guidelines barring incentive-based compensations by specified regulated entities whose assets must be over one billion dollars. These regulations affect the company assets that include its depository institutions, investment advisor subsidiaries, and broker dealers (Goldman Sachs Group Inc., 2010).
In essence, the regulations tend to restrict compensation practices that encourage inappropriate risks through the provision of excessive compensations to the company’s executive officers, principal shareholders or the directors as well as employees that may result in financial loss to the company (Goldman Sachs Group Inc., 2010).
The act also requires the financial sector regulators to establish guidelines enhancing disclosure of incentive based compensation arrangements. The disclosure should be done to the regulators as well as to all stakeholder of the company. These regulations will affect the way the company structure its compensation plans to its executives, shareholders as well as its employees.
For instance, the Federal Reserve Board has issued guidelines requiring companies in the industry to have compensation arrangements that take into account the companies’ risks and are consistent with safe practices.
The guidelines have also put in place some of the principles concerning the incentive compensation arrangements. One of the principles is that any compensation arrangements are supposed to provide employees incentives that leverage financial results and risks in such a way that does not persuade employees to expose their firms to irresponsible losses (Goldman Sachs Group Inc., 2010).
Another principle is that the compensation arrangements should be in line with the effective controls and risk management practices. Finally, strong corporate governance should support the compensation arrangements. The company compensation practices are based on these principles.
The effectiveness of traditional bases for pay
Employee’s compensation comprises of the annual salary as well as appropriate variable compensations given out at the year-end. However, these compensations vary depending on each employee’s position in the company, skills, as well as the contribution of the employees based on performance. Compensation based on performance increases each employees output besides motivation. Employees under minimum income threshold have variable compensations comprising of both cash-based and equity-based.
The annual cash compensations are not supposed to be too much in such a way that it could compromise the value ascribed to long-term stock incentives. The reason is that long-term stock incentive could only be realized through long-term responsible behavior.
Moreover, percentage compensations awarded in cash should decrease as the total compensations given to employees increases. As indicated before, compensations should be based on performance (Jensen, 1998). The company performance assessment focuses on risk management, commercial effectiveness, reputational judgment, teamwork, compliance, and communication.
The individual performance recognition will be within the constraints of the firm’s general performance and within the competitive market for the relevant talent and performance. It is also within the recommendations of the company business standards committee that emphasizes evaluation criteria based on the reputational risk management. All these factors will be put into consideration to affect the compensation plans for all employees of the firm.
References
Goldman Sachs Group Inc. (2010). Goldman Sachs 2010 annual report. Web.
Goldman Sachs Group Inc. (2011). Goldman Sachs compensation practice. Web.
Jensen, M. (1998). Foundations of organizational strategy. Harvard Business Review, 16(3), 3-11.