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Finance

Banking Executives' Earnings Race: A Tale of Million-Dollar Stakes and Strategic Moves

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Benjamin Hughes

April 5, 2024 - 12:25 pm

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The Titans of Finance: Inside the Jaw-Dropping Earnings Race Among Goldman's Executives

Goldman Sachs Group Inc., a venerable institution in the world of finance, has long been a launchpad for banking executives reaching for the apex of their careers. The ascent to the role of Chief Executive Officer stands as one of the most coveted achievements—a pinnacle that only the fiercest competitors ever have the privilege to experience.

David Solomon and Harvey Schwartz, two distinguished stars within this banking titan, found themselves locked in such a race. David Solomon, resisting the allure of the Carlyle Group Inc., eventually emerged as the victor and now helms Goldman Sachs. In reward for his stewardship, he has received a king’s ransom in compensation, totaling approximately $189 million over the last six years. Solomon's illustrious ascent has not only been a testament to his business acumen but also highlights the immense remuneration that comes with the territory at top investment banks.

However, in an extraordinary turn of fortune, Harvey Schwartz, after stepping away from Goldman and embracing a lengthy interlude, re-emerged at Carlyle, earning himself a staggering sum of $217 million in pay packages since his arrival just one year ago. At the age of 60, Schwartz catapulted over his erstwhile compatriot at Goldman, now overseeing an asset manager whose stock might be lagging behind competitors and whose market valuation stands at a mere eighth of the bank’s, yet still reaping opulent rewards.

This latest scenario is exemplary of the divergent landscapes in executive compensation between investment banks and large buy-side firms. While the former is beset by vigilant shareholders and stringent regulatory oversight, curtailing lavish executive pay, the latter, particularly publicly traded private equity firms, are dispensing their forthcoming leadership with remuneration opportunities that can escalate into the billions, granted they meet a series of milestones spanning several years.

A glance at Carlyle's rivals reveals an even more prodigious dispersal of wealth. KKR’s co-CEOs Joseph Bae and Scott Nuttall were presented with incentives that could see their total holdings exceed $1 billion in stock should they meet all predefined targets in the foreseeable years. Meanwhile, Apollo Global Management extended to its co-presidents stock packages now valued at nearly $700 million should they hit certain performance benchmarks.

Alternative asset managers argue that intertwining executive fortunes with firm performance and stock fortifies alignment with the interests of their investors. This bold strategy of rewarding their top echelons so handsomely has caused a significant shift, attracting the cream of Wall Street talent away from investment banks.

Delving deeper into the specifics, the lion's share of Schwartz's compensation package materialized last year when Carlyle sketched out plans to bestow upon him a five-year stock incentive worth $180 million. These restricted stock units would vest over time, tethering his financial fate closely to the company’s share price growth. Earlier this year, Carlyle infused a further $30 million into Schwartz’s equity awards to reinforce this alignment with shareholder well-being.

In a recent disclosure, Carlyle relayed the board's decision to accord Schwartz a cash bonus that was a substantial two-fold increase over his initial target. This bonus was in recognition of his initial achievements, which included a surge in fee-related earnings, cost-cutting measures, and other strategic realignments. However, for Schwartz to fully harness the scope of his incentives, it's requisite for Carlyle's stock to witness a doubling within the next five years—a feat that would burgeon his equity stake's worth to over $500 million.

Turning the spotlight toward Solomon, we learn that his annual compensation has fluctuated between $17.5 million and $35 million during his tenure, not to mention a special one-time grant. Goldman's stock has seen a rise by over 80% in this interval, padding the value of his equity, and Solomon also enjoys carried interest from certain Goldman investment vehicles.

David Solomon and Harvey Schwartz's Executive Compensation Source: Company filings

While formidable, the rate at which Solomon is accruing wealth seems tepid compared to that of his predecessor, Lloyd Blankfein. The former CEO’s earnings reached a zenith just before the financial crisis, including a record $68 million package for 2007, a sum that contributed to Blankfein's billionaire status.

Private equity institutions such as Blackstone Inc., Apollo, and KKR & Co. have soared beyond their early years of groundbreaking deals. Now, as publicly traded entities, they opt to embellish their executive compensation with abundant stocks, a reflection of their evolution from daredevil corporate raiders to a more omnipresent investment entity in the global market.

Back in the halls of American investment banking, the stagnation in CEO pay has become a thorn in the side for many. Annual earnings for these CEOs have not surpassed $40 million in many years. JPMorgan Chase & Co.'s Jamie Dimon, after a landmark profit year in 2023, took home $36 million. Brian Moynihan of Bank of America received $29 million, representing a slight decrease in pay.

Internally at Goldman, debates have heated up between Solomon and his deputies over compensation. Observations have been made on the sheer potential for profits their counterparts at buy-side firms could amass. This realization has instigated a quest among Goldman's highest ranks to discover alternative mechanisms to elevate their compensation, engaging with lucrative opportunities within other sectors of the firm.

The year 2021 was marked by Goldman's institution of a unique, singular award designated for Solomon and Chief Operating Officer John Waldron. This decision, prompted by the escalating "war for talent," was intended to solidify the top executives' positions within the firm.

The dissatisfaction among Wall Street bankers is unlikely to see resolution anytime soon. In an unexpected development, Glass Lewis, a prominent proxy advisor, issued Goldman's executive pay plan an "F" grade. They've called upon shareholders to repudiate raises that represent a "significant disconnect between pay and performance."

Read the full report on Goldman's pay plan and Glass Lewis’s recommendations here.

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In summary, the race for executive compensation on Wall Street is fierce, with the rewards at the pinnacle proving to be more opulent than ever before. Investment banking salaries, although impressive, are beginning to pale in comparison to the lavish remuneration packages that private equity and other buy-side firms are offering. As a result, these astronomical payouts may continue to upend the balance of talent between traditional banks and their modern buy-side counterparts, rendering the financial landscape ever more competitive in the years to come.