After the bailout repayment, it’s the bonus payouts that are making Goldman Sachs Group Inc. (GS) uneasy. On Monday, Goldman was reportedly pulled up by one of its institutional investors who alleged that the bank is planning to make unseemly bonus payments. The lawsuit against Goldman claims that the company is expected to shell out more than $22 billion against bonus payments at the end of 2009.
The lawsuit, filed with the New York Supreme Court by the Security Police and Fire Professionals of America Retirement Fund, names chief executive Lloyd Blankfein and other executives and board members as defendants. Goldman’s move to set aside billions of funds for paying out bonuses at the end of the year is being severely condemned by its investors. In Nov 2009, the shareholders had already voiced their concerns regarding bonus payments to executives and had asked the company to snip the size of such bonuses and reward them with physical stock instead.
This came in soon after the company had repaid its $10 billion bailout amount in Jun 2009. However, the company has bowed to the investors’ wishes. Indeed, Goldman had publicized its intention last week of relinquishing cash bonuses for its top 30 executives and paying them entirely in restricted stock.
With stellar earnings results across all quarters of 2009, we believe Goldman has the potential to conservatively manage its risk, capital and liquidity levels, thereby raising profitability even in a difficult macro environment. Moreover, the company’s capital ratios remain strong in comparison to its large cap bank peers such as Citigroup Inc. (C), Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM); giving it an edge to capitalize on newer opportunities once the economy recovers.
Although some doubts have been raised regarding the company’s payout plans and noticeable changes made in its financial statements with respect to the headcount and per-employee compensation, we believe that the company will be able to defend itself meaningfully and also apportion justified compensation to its employees, thereby restoring investors’ confidence. As a result, we maintain our Outperform rating on the stock.
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