A number of large Goldman Sachs (NYSE:GS) shareholders would like to see the firm’s profits in their pockets and not in the bank accounts of the Goldman partners.

The Wall Street Journal reports that many institutions that hold Goldman shares are upset that the firm’s EPS will  be down this year even though the investment bank will post record sales. A great deal of this drop is because Goldman issued 100 million shares to improve its balance sheet. Cutting compensation would rebuild EPS figures which should help drive up the value of the stock.

The flaw in the shareholders’ argument is simple. Big pay packages are, in Goldman’s case, based on remarkable performances. Goldman’s key partners have created results that have pushed the company’s stock from a price of $52 a year ago to $173. Morgan Stanley’s (NYSE:MS) shares have performed about as well, but the stocks in other major banks have lagged well behind the better than three-fold improvement in Goldman’s share price.

Congress and the Administration assumed that they can reign in pay packages on Wall St. and that performance at firms like Goldman will not be effected. Now, Goldman shareholders are making a similar assumption. Programs to cut pay packages will certainly drive some of the best financial talent to private equity firms and hedge funds. The question is how large the exodus will be.

Goldman’s shareholders may win their fight with management over pay packages. They may also lose in the long run if a number of the company’s best people leave.

Look at Goldman Sachs in the 24/7 Wall St. 500

Douglas A. McIntyre

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