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Is Blankfein's Huge Pay Hike Justified?

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The Goldman Sachs Group, Inc. (GS - Free Report) CEO Lloyd Blankfein received a massive pay raise of nearly 75% in 2012, as per a latest SEC filing by the bank. However, the hike in compensation, which will bring Blankfein’s salary to $21 million, is mostly driven by the doubling of the stock-based compensation and bonus. Further, this will be Blankfein’s highest pay since 2007, before the financial crisis walloped major U.S. banks.

With this increment, Blankfein will join the elite list of the highest paid mega bank CEOs, surpassing Bank of America Corporation’s (BAC - Free Report) CEO Brian T. Moynihan, whose pay package amounted to $12.1 million in 2012. Blankfein also surpassed JPMorgan Chase & Co. (JPM - Free Report) CEO Jamie Dimon, whose pay was nearly $11.5 million for 2012, after his bonus was substantially slashed following the London Whale trading debacle. However, Blankfein will be behind Wells Fargo & Company’s (WFC - Free Report) John Stumpf, who was paid $22.87 million in 2012.

However, the foremost question lingering in the minds of investors is whether Blankfein’s hefty pay hike justified? The hike, as believed, is well deserved keeping in mind Blankfein’s contribution to Goldman, when he took over the reins of the company in 2006. He has been instrumental in almost doubling full-year 2012 net profits to $7.5 billion from 2011. Further, Goldman’s shares rose a whopping 41% in 2012 and went up by almost 17% year to date.

Blankfein has also been adept in strategically evaluating the various facets of Goldman’s major businesses. Besides announcing numerous cost cutting initiatives and divestment of non-core units, the CEO has single-handedly revived profitability at Goldman with several legal settlements. This impressive performance led to Blankfein receiving $2 million as base pay, and a cash bonus and stock award of $5.7 million and $13.3 million, respectively, each of which almost doubled compared to the prior year. Further, Blankfein was awarded a $5 million cash bonus to be paid out over the span of 3 years, subject to the meeting of certain targets.

We believe Blankfein’s pay hike will prove to be a major morale booster. Even though Goldman’s fundamentals remain highly promising with a diverse business model and a strong balance sheet, regulatory issues, including lawsuits and the fundamental pressures on the banking sector are anticipated to pose as headwinds to profitability.

Yet, we consider Goldman to be a value investment due to its steady dividend-yielding nature, well-managed global franchise and healthy capital base.

Goldman currently carries a Zacks Rank #3 (Hold).


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