Goldman CEO says pay backlash is 'appropriate'

FRANKFURT -- Goldman Sachs CEO Lloyd Blankfein said Wednesday that the furor over bankers' massive bonuses is "understandable and appropriate."

"There is little justification for the payment of outsized discretionary compensation when a financial institution lost money for the year," Blankfein told the Handelsblatt Banking Conference in Frankfurt, Germany.

Bonuses are important to attracting and retaining top talent, but "misapplied, they can also encourage excess" and "work against the public interest," he said.

Blankfein pointed to principles Goldman laid out in May, including making the largest pay packages more performance-based, deferring compensation to reflect long-term performance, banning contracts that guarantee high bonuses and making top managers keep most of their pay in stock until they retire.

"Multi-year guaranteed employment contracts should be banned entirely. The use of these contracts unfortunately is a common practice in our industry," he said.

His comments follow a meeting of top government finance officials in London last week. The group agreed to draft principles similar to Goldman's for consideration at an upcoming meeting of national leaders.

European countries had pushed for the group to enforce a strict cap on individual payouts and collective bonus pots at financial institutions, but that idea was rejected.

Blankfein also addressed concerns that overly complex financial products destabilized the financial system, and laid out broad principles for regulation that would limit systemwide risk.

Greater scrutiny of trade in complex instruments is needed to keep banks in check, he said.

But with the banking sector bouncing back from the financial crisis, regulatory overkill could choke off economic growth, Blankfein said.

Martin Blessing, head of Commerzbank, said it is time to end guaranteed bonuses for investment bankers, fuelling debate on what role payoffs play in destabilizing the financial system.