An interesting metric at Goldman…
Yesterday, Goldman Sachs (GS) reported third quarter profits of $3.19 billion on revenues of $12.37 billion, which prompted stories like this one in the New York Times about Goldman’s public relations problems over giving high bonuses.
While the release didn’t talk about the controversial bonuses directly, it did have this to say on pg. 3:
Compensation and benefits expenses (including salaries, estimated year-end discretionary compensation, amortization of equity awards and other items such as payroll taxes, severance costs and benefits) were $5.35 billion, which was higher than the third quarter of 2008, due to higher net revenues. The ratio of compensation and benefits to net revenues was 43.3% for the third quarter of 2009 (compared with 48.3% for the second quarter of 2009), resulting in a ratio of compensation and benefits to net revenues of 47.0% for the first nine months of 2009. This ratio was 49.0% for the first six months of 2009 and 48.0% for the first nine months of 2008.
Doing some quick math, you get to around $17 billion set aside for compensation and bonuses, which the Times calculates to around $700K on average for each of the company’s 31,700 employees.
But here’s what caught our attention: the use of the term “ratio of compensation and benefits to net revenues”. This isn’t a new term that Goldman started using post-financial crisis. A quick skim of their filings shows that they’ve been using this metric at least since 1998. What’s surprising, however, is that when you look to see which other companies are using this metric, there’s not a lot, especially in the financial space. Among the few we did find was Cowen (COWN) whose ratio is much higher than Goldman’s — around 60% according to the Q they filed back in August. Lazard (LAZ), whose Chairman and CEO, Bruce Wasserstein, died earlier this week, is also around 60% according to that Q.
In light of those two numbers, Goldman looks almost miserly with its employees.
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Posted in Tags: 8Ks, Goldman Sachs |
 8 Comments » |
October 16th, 2009 at 10:15 am
hmm From Reuters today.
Historic pay package lives on. Lazard CEO Bruce Wasserstein, who died this week, was notorious for his blockbuster hostile takeovers. Now, he is achieving fresh notoriety for the enormous pay he commanded. Some 4.4M restricted stock units he held – worth $188M at today’s prices – will be vested due to his death. The payout makes the legendary CEO one of history’s most richly compensated investment bankers, at a time when Wall Street chieftains are under fire for taking outsized pay packages. Wasserstein’s 2008 pay package was worth $20.4 million, most of it in restricted stock.
… while Goldman plays it down. As the Wall Street bonus controversy blazes on, Goldman plunked a smaller chunk of revenue into its compensation pool. But employees need not cinch their belts: they are still on track to pocket an average of $630,000 each – rivaling record bonuses in 2007. Goldman has already set aside some $16.7B for bonuses this year, and looks headed toward the $20B mark. The firm may be hoping its recent show of austerity will quiet critics, but numbers like these make that unlikely.
October 16th, 2009 at 12:43 pm
Did u do a right math?
$5.35 b should be the finAL estimates for the end of the yr. Let ‘s give it a 20% raise. it is about 300k per head, i think. still high, but not as high as what u said.
October 16th, 2009 at 12:50 pm
Even when you heard reports on comp at Morgan Stanley, JPMorgan and Merrill Lynch (mostly during last year’s meltdown), Goldman seemingly lagged behind them.
The NY AG has a good report on comp at banks (obviously lower at commercial banks):
http://www.oag.state.ny.us/media_center/2009/july/pdfs/Bonus%20Report%20Final%207.30.09.pdf
I think there are several explanations:
* Goldman generates more revenue per employee. Whether that’s due to more talented employees or the scale of its operations, compensation’s not going to scale 1:1.
* Different business mix. Lazard’s more specialized, and — while I don’t know the extent of how shrinking M&A vs increased bankruptcies impacted them — may have had to pay up to retain employees. In 2008-9, Merrill paid out $30.7b in comp despite negative $1.3b in revenue, so it wouldn’t surprise me that firms are all over the board, with the more successful ones paying out a lower % of revenue.
It’s a metric that seems to be receiving more focus, and it’s probably been pretty fair for Goldman’s operations. For short-term stuff like trading, underwriting, M&A advisory, etc. on a largely fair-value balance sheet, employees’ quarterly contributions probably tag closely to quarterly revenue, whereas net income would be much more volatile. For commercial banking operations — the borrow-short-lend-long types — the measure’s probably not going to be as big a factor, as you would be compensating employees for investments that may have taken place 5-10 years ago and are still held on the balance sheet at face value.
October 16th, 2009 at 1:25 pm
Envy is a very common human trait!
October 16th, 2009 at 1:43 pm
@kk Not quite following your math here, but the math I cited actually came from the Times. They’re the ones who calculated it at $700K per employee.
October 18th, 2009 at 9:53 am
What this says to me is that I won’t invest in Goldman Sacks. I’m all for taking good care of you employees but I find it hard to believe that Goldman Sacks employees are so good they should earn a salary + 700k.
Does anyone really believe that a company can make money long paying employees at that rate?
October 22nd, 2009 at 2:15 pm
Goldman utilizes numerous non-employee (1099) labor. In the past, they were never included in the headcount number. Now they are. Which lowers the amount per head artificially.
October 24th, 2009 at 2:55 am
Goldman is an ingenious parasitic enterprise that profits from the losses of others. This is one of the most predatory operations ever conceived. By definition, Goldman’s profits come from buying an asset cheaper than it’s really worth or selling an asset for more than it’s really worth–that’s what traders do! Investing in a loan shark is no different; it may be very profitable but you’re not doing business with monks either.
btw, net revenue is a very common metric used by broker-dealers…