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Vampire squid offers lessons in stock-option ethics

Goldman Sachs CEO Lloyd Blankfein testifies before a Senate investigative committee on Capitol Hill in Washington, DC, April 27, 2010. Investment bank Goldman Sachs January 11, 2011 pledged a new era of transparency and commitment to customers' interests after taking a beating over its role in the US financial crisis.

JIM WATSON/AFP/Getty Images

Given the reputational drubbing Goldman Sachs Group Inc. has endured, surely its executives would lie low, avoiding the appearance of money-grubbing while so many Americans are still trying to lift themselves up from the rump-kicking they took in the financial crisis.

Surprise! More than 30 Goldman executives pocketed $22-million in stock-option profits last month. Just another example of what Rolling Stone polemicist Matt Taibbi called "the great vampire squid, wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money" – right?

However, if we set aside the rather large questions of Wall Street culture that Goldman has raised in recent years, I say this: The executives' recent option profits are not the product of a greed-addled, corrupt institution; instead, they are the hallmark of a company that's doing a number of things right with executive compensation.

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Goldman's executives exercised their options in October; they came to the attention of the Wall Street Journal last week. The Journal's lead paragraph gets to the heart of the matter: "Business is tough at Goldman Sachs Group, but the past is paying off." Goldman gave the options to its executives in 2002, three years after the company's initial public offering.

As with many executive stock options, the Goldman ones carried 10-year terms; they were slated to expire in November. What that means is the Goldman executives – all 30-plus of them, according to the Wall Street Journal, held the options as long as possible before using them.

What shareholders of public companies need to worry about is insiders who do the opposite – cash out options as soon as they "vest," or become usable, which can be one to three years after the company grants them.

(Some companies, in a practice deeply frowned upon by corporate governance types, grant options that vest immediately, or beginning in as little as 30 days. If you see an executive using them that quickly and selling the underlying shares, run quickly.)

The Journal notes the Goldman execs were first able to use the options in 2006, and they have been profitable at all times since, except November and December 2008. "Few partners decided to sell."

Goldman's execs have a whole slew of options they can't use, however, because Goldman awarded them between 2005 and 2008, and their exercise price – the price at which the option allows the holder to buy shares – is higher than current market prices. (Goldman peaked in October 2007 at about $239, compared with current prices around $125, the Wall Street Journal notes.)

One figures if you're a shareholder who bought into Goldman during that period, it's little comfort that Goldman has provided gains for people who bought in three years earlier than you did.

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Here's the thing to keep in mind, though: There's no option-based reward for the Goldman execs right now for the performance from 2005 on. And if Goldman shares can't return to and exceed those past levels, the options will eventually expire worthless. (Goldman CEO Lloyd Blankfein lost some 2001-era options last year for that reason, the Journal says.)

Still sound unfair? Critics of stock options have hammered at the type that provides executives some incentive to goose share prices recklessly; by the time of the financial crisis, the U.S. outlawed them at companies getting bailouts.

Goldman didn't meet that description, but it ceased handing them out anyway. Another good choice by the supposed vampire squid.

READERS: Should incentive options that reward share-price growth be banned across the board?

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More

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