The purpose of this article is not to justify the payment of nine figure bonuses, but merely to put them in perspective.
Goldman Sachs is catching uber-flak from politicians and the public alike for planning to pay a $100 million bonus ¹ to its CEO, Lloyd Blankfein.
Keeping in mind that Goldman Sachs had a very good year in 2009 reporting profits of $13.9 billion, let’s see how excessive the $100 million bonus really is?
1. Bonus as Percentage of TARP Funds
As a percentage of the TARP funds received by Goldman Sachs, Blankfein’s 2009 bonus is de minimis. It represents exactly one tenth of one percent of the $10 billion in TARP funds Goldman Sachs received in 2009. Using the percentage-of-TARP-Funds Formula as our bonus ceiling, a business that received, say, only $1 million ² of TARP funds, could pay its CEO a maximum bonus of $10,000.
2. Bonus as Percentage of Profits
If we were to measure the reasonableness of a CEO’s bonus as a percentage of annual profit, this would be the formula:
A = Bonus
B = 2009 Net Profit
C = Bonus as Percent of Profits
Formula: A/B = C
Now let’s compare the Goldman Sachs CEO bonus to the bonus paid by a hypothetical small business to its CEO in 2009.
a) The Goldman Sachs Bonus
A = $ 100,000,000
B = $ 13,900,000,000
C = Variable
100,000,000/13,900,000,000 = .0072
Blankfein’s bonus of $100 million is equal to .0072 ( .72 of one percent) of Goldman Sachs’ 2009 net profit.
b) The Hypothetical Small Business Bonus
Now let’s take the case of a business that had net profits in 2009 of $350,000. It’s board of directors agrees to pay the company’s CEO – we’ll call him Richard Greedy – a bonus based on the same percentage of profits that Blankfein received from Goldman Sachs.
Here’s the calculation:
A = Variable
B = $ 350,000
C = .0072 (The Blankfein Percentage)
.0072 x 350,000 = $2,520
And if the company realized profits of $1,000,000, Greedy’s bonus would increase to a whopping $7,200.
Hardly excessive.
c) Conclusion
The bonus Goldman Sachs wants to pay to its CEO is the percentage equivalent of a bonus of $2,520 paid to the CEO of a small business with 2009 net profits of $350,000. Blankfein’s bonus, then, is large only in terms of absolute numbers, but quite tiny as a percentage of Goldman Sachs’ 2009 profits.
The only reason politicians like President Obama make a big stink about Wall Street bonuses is because the issue is political manna from heaven. The masses are likely to support a President who appears to be outraged at excessive CEO compensation packages.
Footnotes:
¹ Goldman Sachs has said that the rumors of the $100 million bonus are false. For purposes of this article, I have used the $100 million dollar figure as a worst case scenario.
² I used the $1 million figure for illustration purposes only. No business received TARP funds of this small an amount.
Related Posts:
- Class Warfare: The Excessive Compensation Canard
- AIG Bonuses are Less Than 1/10th of a Percentage Point of Total AIG Bailout Funds
2 responses so far ↓
1 Rob P // Feb 3, 2010 at 8:05 pm
You fudged your numbers in part (a). Upon review, 0.0072 is not .072 of one percent – rather, it’s .72 of one percent.
It’s true however, that the bonus pay is a straw man. Blankfein is well compensated for a) his contacts within Congress , b) his ability to throw his weight around with political contributions to both parties, and c) his company’s ability to innovate and skirt the law with front-running trades, insider trading, naked short selling, and trading at 1,000 times per second with software unavailable to the general public (all of which are made easier by (a) and (b)). Ethics aside, Mr. Blankfein is being appropriately rewarded.
2 Peter // Feb 3, 2010 at 9:09 pm
Rob,
Thanks. I had a feeling I screwed up my decimal points. I fixed it.
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