In things that are not a surprise, a Delaware court this week threw out a lawsuit against Goldman Sachs directors and officers for paying bankers and traders The Wrong Way. Specifically:

The Plaintiffs contend that Goldman’s compensation structure created a divergence of interest between Goldman’s management and its stockholders. The Plaintiffs allege that because Goldman’s directors have consistently based compensation for the firm’s management on a percentage of net revenue, Goldman’s employees had a motivation to grow net revenue at any cost and without regard to risk.

The Plaintiffs allege that under this compensation structure, Goldman’s employees would attempt to maximize short-term profits, thus increasing their bonuses at the expense of stockholders’ interests. The Plaintiffs contend that Goldman’s employees would do this by engaging in highly risky trading practices and by over-leveraging the company’s assets. If these practices turned a profit, Goldman’s employees would receive a windfall; however, losses would fall on the stockholders.

Now, it should be said that this theory is not unprecedented, and not entirely crazy. Nor is it entirely sane: generally maximizing income is good for shareholders, and if you don’t like trading risk you could always, I don’t know, not buy shares of an investment bank. Linking comp to net revenue is broadly better than linking it to lots of other things, like peer-benchmark pay or fanciness of country club memberships.
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