Goldman Sachs Group Inc. (GS) changed how it calculated year-end bonuses in 2005, corrupting a culture of teamwork that existed previously, according to a book published today by former employee Greg Smith.
Before 2005, the company determined workers’ annual awards “not just on how much business you’d brought in, but also on how good you were for the organization,” Smith, a former vice president, writes in “Why I Left Goldman Sachs: A Wall Street Story.”
“From 2005 until the present day, the system has become largely mathematical: you were paid a percentage of the amount of revenue next to your name,” a figure that could vary from 5 percent to 7 percent, wrote Smith, 33, without saying how he learned about such a change. “The problem with the new system was that people would now do anything they could -- anything -- to pump up the number next to their name.”
The account by Smith, who quit after a 12-year career at Goldman Sachs with a March 14 critique of the culture shift under Chief Executive Officer Lloyd C. Blankfein, contrasts with the “Compensation Principles” that the CEO read aloud at the May 2009 annual shareholders meeting. According to those tenets, the company’s pay practices are meant to encourage teamwork and discourage excessive risk-taking.
“Compensation should reflect the performance of the firm as a whole,” according to the principles. “Assessment areas should include productivity, teamwork, citizenship, communication and compliance.”
The policy also specifies that no one in a “risk-taking role” should have contracts or evaluations “based on the percentage of revenues generated by a specific individual.”
Michael DuVally, a spokesman for New York-based Goldman Sachs, declined to comment on the book.
Smith, whose role was to help sell U.S. equity derivatives, wrote that he watched junior and senior employees in the sales division fighting over gross credits, known as GCs, that show how much money they had made.
“Over time, this corrosive behavior had filtered down through the system,” he wrote. “I must have had to referee at least ten disputes between associates who were trying to increase their share of GCs relative to those of their colleagues.”
Goldman Sachs, the fifth-biggest U.S. bank by assets, has disputed Smith’s account of his career at the firm and said that he was rejected for a promotion and pay increase before his public departure.
Smith is the first ex-employee to write a critical account specifically about the 143-year-old firm, whose alumni include two former U.S. Treasury secretaries and the president of the European Central Bank. Former employees Nomi Prins, Jonathan Knee and Bethany McLean also have written books criticizing some Wall Street practices.