Stephen Foley: Shareholders should get a bonus, too

US Outlook: Never mind philanthropy, what about us?

The top shareholders at Goldman Sachs are getting restive, it is reported – and not before time. While the great vampire squid has been trumpeting the modest and self-interested donations it is making to charity in an attempt to pay reparations for the credit catastrophe, its investors are finally rousing themselves to play their proper role in taming Wall Street pay.

Or at least, maybe just a little bit. Some of Goldman's biggest shareholders are said to have asked, politely, behind closed doors, for a little bigger a share of the money pot.

The surge in trading profits this year means a bumper bonus pool for disbursement at year-end. Long-term shareholders, though, have done less well. Goldman issued so much new stock to bolster its balance sheet during the market panic that there will actually be a big drop in earnings per share. Clipping the bonuses of the bankers would boost earnings handily, they say.

The immediate comeback from Goldman after yesterday's gossip was that no investor has actually gone as far as demanding a specific meeting to discuss this issue. In any case, it says, employee and shareholder interests are aligned. That is missing the point.

Those interests are indeed aligned, directionally, most of the time, but it is not about direction, it is about proportion. How much of the upside should employees have, how much should go to shareholders?

We should all favour a higher proportion to shareholders, for a couple of reasons. Most obviously, many of us will be shareholders through our pension and mutual funds. Also, if shareholders have more to lose when bets go awry, they might pay more attention to the risk management systems within banks, an area that was woefully under-examined in the run-up to the crisis.

At investment banks, of course, the wage bill of top earners really does crater the bottom line. Somewhere between 40 and 50 per cent of net revenues have traditionally been put into the pool for salaries, benefits and end-of-year bonuses. It is a good time for shareholders of Goldman and its peers to be pressuring for that number to come down.

The returns on equity that banks enjoyed during the reckless years are going to be coming down as regulators apply new curbs on derivatives trading and demand that big bets are backed by more capital. Shareholders ought to be compensated for these earnings-crimping reforms.

Go on. Strike up the usual chorus: "If you cut bonuses, you will simply drive the best employees to leave for the competition."

I wouldn't deny that entirely, but it is not the whole truth. If it were, how would Goldman be able to boast, as it did yesterday, that its compensation ratio has always been "at or among the lowest" in the industry? Reputation and intellectual dynamism counts, just a little, even when it is bankers who are choosing where to work. It is also tempting to call some bluffs, and see if lower-paid employees really are less talented than the supposed rainmakers.

If compensation is coming under pressure all across Wall Street, the issue should be less acute, in any case. And shareholders have an incentive to act together to douse the public fury on Wall Street pay. It is difficult to know how long governments can hold the line against pay caps and other draconian measures sure to have unintended consequences.

The way bankers are paid, and the structural incentives they have to make reckless bets that rebound on taxpayers, certainly are proper matters for regulators, politicians and the public. But the amount they are paid – that is squarely the responsibility of the people who own the company.

Shareholders' silence on pay has been one of the odd failures of the market economy, not just in banking but across the stock market. Institutional investors delegate decisions on executive compensation to a self-perpetuating class of directors, who sit on each other's remuneration committees and bid up each other's pay in the name of "competition for talent".

Investors love a chief executive with a reputation for locking the stationery cupboard in the name of cost-cutting. So why do they turn a blind eye to largesse in the boardroom?

Usually, the executive wage bill does not put a big enough dent in earnings per share for any single shareholder to be bothered with. That's not the case on Wall Street.