Oct. 16 (Bloomberg) -- Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., is in a pickle.

His investment bank yesterday said it had earmarked $16.7 billion for employee bonuses, equal to $527,192 per worker, from its profit for the nine months ended Sept. 25. That put Goldman Sachs on a pace to match the $20.1 billion in bonuses it chalked up in 2007.

Blankfein has acknowledged that his firm’s massive payouts put it in a bad light with both U.S. taxpayers -- who have tossed billions in bailout money at Goldman Sachs and the rest of the banking industry -- and critics of Wall Street’s bonus- heavy pay system.

Let’s help Blankfein find a way out of this embarrassment, showing him what else he might do with that $20 billion:

1. Use the money to increase next year’s pay for all Goldman Sachs employees -- putting the bonus system to rest.

2. Share the money with Americans who rescued Wall Street from the worst financial mess since the Great Depression.

3. Increase the firm’s paltry dividend payout.

4. Buy commercial banks.

5. All of the above.

Far-fetched, I know, but stick with me.

The bonus system -- typically amounting to 60 percent of Wall Street’s pay -- is what led banks to take outsized risks in disastrous subprime mortgages that fueled the credit debacle. Why not raise 2010 salaries of Goldman Sachs employees by $20 billion and junk the bonuses? Or pay $5 billion in one-last-time bonuses, raising salaries by the remainder?

Tax Return Bliss

Blankfein instead might go with my second option and send the cash to the Internal Revenue Service. The IRS could pass it on to citizens when they file their next income tax returns.

Divide $20 billion by 308 million, the U.S. population, and you get about $65 apiece. Not a fortune though enough for people to replenish their supplies of socks and underwear.

While Goldman keeps insisting that it didn’t need a bailout, it must have found use for the $10 billion the government invested in the company under the Troubled Asset Relief Program.

The firm repaid the money as the financial crisis started to ease -- but it also raised $10 billion by selling $5 billion in preferred shares to Warren Buffett’s Berkshire Hathaway Inc. and a like amount of common stock in a public offering. The Federal Reserve is also backing Goldman debt. Blankfein does owe us.

Owners’ Delight

It’s high time Goldman Sachs did something for its shareholders, which brings us to option No. 3. The firm now only pays out about $700 million a year in dividends, a yield of less than 1 percent

While Goldman’s shareholders have done fine on a total return basis -- 15.6 percent annually in the five years ended Sept. 30 -- the stock has declined from about $235 two years ago to Thursday’s close of $188.63. How about resurrecting an ancient corporate custom, the year-end dividend, and give more back to the owners?

Option No. 4 comes to mind because at the depth of the crisis, Goldman Sachs became a commercial bank, hoping that would make the firm look less risky to investors.

Goldman could reduce its risk by acquiring a bigger commercial bank base, getting billions in deposits to back up its investment banking business. (While I’m opposed to big banks getting bigger, that’s probably a lost cause.)

Status Quo

None of the above will happen, of course. Blankfein will justify the huge bonuses by citing huge profits and Goldman’s long-standing bonus system.

Goldman earned $3.19 billion, or $5.25 a share, in the third quarter, as it continued to make big bets on the financial markets.

By repaying the $10 billion to the Treasury, Blankfein has wiggled out of government pay strictures that competitors like Citigroup Inc. and Bank of America Corp. still face.

The pay culture may change on the rest of Wall Street. Not at Goldman Sachs.

(David Pauly is a Bloomberg News columnist. The opinions expressed are his own.)

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To contact the writer of this column: David Pauly in Fort Myers, Florida dpauly@bloomberg.net

Last Updated: October 15, 2009 21:00 EDT