Bonus Points for Goldman

With the announcement last week that its top seven executives would forgo annual bonuses for 2008, Goldman Sachs continues to demonstrate why it has always stood out from the rest of Wall Street as a leader that represents the best in capitalism. By giving up tens of millions of dollars in compensation, Goldman’s chief executive, Lloyd Blankfein, its co-presidents, Gary Cohn and Jon Winkelried, and their colleagues understand that in tough times, leadership by example matters. Indeed, their willingness to give up money that they rightly deserve—these are the executives, after all, who deftly steered Goldman through the storm as peers such as Bear Stearns, Lehman Brothers and Merrill Lynch crashed and foundered on the rocks—proves why brilliant managers deserve big bucks when their companies have a good year.

By turning itself into a bank holding company in September, and shedding its enormously profitable investment banking business, Goldman showed a quick grasp of the way the tide was turning. Last year, while generating $11.6 billion in profit—a record for an investment bank—Goldman also purged its portfolio of dubious mortgage-related securities, thereby avoiding meltdown when the credit crisis hit. It was that kind of management that led Warren Buffett to pump $5 billion into Goldman the week the news broke that it would not survive as an investment bank. (It’s also the kind of management savvy epitomized by ex-Goldman chief executive and current Treasury secretary, Henry Paulson, a fact unfortunately unrecognized by the knee-jerk reactions from naïve politicians from both parties back when Mr. Paulson unveiled his rescue plan.) Goldman’s top people also knew, of course, that, with the firm having taken $10 billion in federal bailout money, the task of trying to explain to the public why its top tier actually did deserve multimillion-dollar bonuses—the firm, after all, did not tumble into bankruptcy, nor was it forced to merge with another bank—would only further mire Goldman in the nationwide public angst. At a time when unemployment is rising, households are afraid of losing their homes and retail stores are facing the bleakest holiday season in memory, Goldman stepped up and put logical arguments aside in favor of being a good corporate citizen. So far, UBS’s top talent has followed Goldman’s example in declining a bonus; Morgan Stanley is feeling pressure to follow suit.

The trend is moving quickly toward top executives getting paid in line with how their company does. This is the right way to go. But it would be unrealistic to think that this will level the compensation playing field: Companies cannot keep top talent without paying for it, and it’s the top talent that often keeps companies from imploding, with huge costs to all.