Gold­man ag­o­nized over pay cuts as prof­its suf­fered

The Pak Banker - - COMPANIES/BOSS -

Top ex­ec­u­tives at Gold­man Sachs have been con­sid­er­ing deep cuts to staffing lev­els and pay for at least two years, but feared too many lay­offs would leave the firm un­pre­pared for an even­tual pickup in business, peo­ple fa­mil­iar with the bank said.

They in­stead chipped away at staff lev­els and fo­cused on non-per­son­nel ex­penses that are less painful to cut. But in­vestors pres­sured the bank to cut costs fur­ther, the sources said, Gold­man gave in. The largest stand­alone in­vest­ment bank said in the fourth quar­ter it cut the per­cent­age of rev­enues it pays to em­ploy­ees in half to 21 per­cent. That brings the ra­tio for the en­tire year to its sec­ond­low­est level since the bank went pub­lic in 1999.

With less money go­ing to em­ploy­ees, more was avail­able for share­hold­ers. The bank's an­nu­al­ized re­turn on eq­uity - which mea­sures how well the bank uses share­holder money to gen­er­ate profit - jumped to 16.5 per­cent in the fourth quar­ter from 5.8 per­cent a year ear­lier

"Ar­guably for the first time, Wall Street's share­hold­ers are get­ting the lion's share of the prof­itabil­ity," said Brad Hintz, a for­mer Mor­gan Stan­ley trea­surer who is now an an­a­lyst at Bern­stein Re­search. The bank's quar­terly profit tripled, helped by gains from in­vest­ments and bond trad­ing as well, and in­vestors sent its shares up 4 per­cent to $141.09, their high­est level since 2006 An­a­lysts said other banks are likely to feel pres­sure to keep their com­pen­sa­tion ex­penses in check after Gold­man's re­sults. But for Mor­gan Stan­ley (MS), the sec­ond-big­gest stand­alone U.S. in­vest­ment bank, pay­ing out a lower per­cent­age of its rev­enue to em­ploy­ees could be tough be­cause an­a­lysts be­lieve its rev­enue fell last year. Gold­man missed the worst pit­falls of the fi­nan­cial cri­sis but has suf­fered pub­lic re­la­tions em­bar­rass­ments from trades it ex­e­cuted dur­ing the cri­sis and from ex­ec­u­tives' com­ments af­ter­ward. The bank, along with the rest of the in­dus­try, is strug­gling to fig­ure out how to nav­i­gate the post-cri­sis world, in which clients trade less and reg­u­la­tions and cap­i­tal rules crimp prof­its in many busi­nesses.

Whether Gold­man main­tains its dis­ci­pline on pay will be a test for Har­vey Schwartz, who suc­ceeds David Viniar as CFO at the end of this month. On a con­fer­ence call with in­vestors, Schwartz de­clined to pro­vide a tar­get for com­pen­sa­tion lev­els, but em­pha­sized that share­holder re­turns would be one cru­cial fac­tor in de­cid­ing how much rev­enue goes to em­ployee pay.

"We don't look to over­pay any­body," Schwartz said. Gold­man first pub­licly sig­naled its in­tent to get se­ri­ous about cost-cut­ting in July 2011, when Viniar out­lined a plan to re­duce costs by $1.2 bil­lion a year, partly by lay­ing off em­ploy­ees. Since then, Gold­man ex­panded that cost-cut­ting plan by $500 mil­lion and has win­nowed staff almost ev­ery quar­ter.

Staff re­duc­tions have tar­geted big earn­ers, in­clud­ing dozens of part­ners, who have left since the start of 2011. Sources inside the bank ex­pect that ex­o­dus to con­tinue this year as Gold­man makes way for younger em­ploy­ees to move up the lad­der. An­a­lysts say that strat­egy is common.

"The po­lite way to char­ac­ter­ize it is a ' gen­er­a­tional change' - where you pro­mote the young guys and you don't pay them," said Hintz. In 2008, as the bank's rev­enue dropped, av­er­age pay per em­ployee fell as well. While the av­er­age Gold­man worker brought home nearly $622,000 in pay in 2006, that fig­ure dropped to $367,057 per per­son in 2011, with the big­gest de­cline hap­pen­ing be­tween 2007 and 2008.

But the per­cent­age of rev­enue that the bank paid to em­ploy­ees did not stop fall­ing un­til now. The fourth-quar­ter drop meant that for all of 2012, Gold­man paid em­ploy­ees 37.9 per­cent of the bank's rev­enue, down from 42 per­cent in the pre­vi­ous year.

"Man­age­ment ap­pears to be do­ing a su­perb job at keep­ing all ex­penses down and, in par­tic­u­lar, re­tain­ing qual­ity peo­ple with­out giv­ing all the rev­enue away in the form of com­pen­sa­tion," said Joe Ter­ril, pres­i­dent of St. Louis-based in­vest­ment firm Ter­ril & Co, who in­vests in bank stocks.

Many banks are fac­ing the same long-term rev­enue pres­sure as Gold­man, and an­a­lysts ex­pect lay­offs across Wall Street. Mor­gan Stan­ley plans 1,600 job cuts in 2013, while Gold­man cut 900 jobs in 2012, equal to about 3 per­cent of its work­force. But lay­ing off staff may not be enough, and em­ployee pay may have to fall too. Hintz, the Bern­stein Re­search an­a­lyst, es­ti­mates that across Wall Street av­er­age pay in trad­ing busi­nesses could fall 20 per­cent.

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