Goldman Compensation Doesn’t Add Up

Goldman Sachs
Goldman Sachs

Bad news if you work at Goldman Sachs: It’s not going to be a great bonus year. But if you own Goldman Sachs shares, you might think it should have been worse. Goldman raised the percentage of revenue it pays as compensation to employees, a.k.a. the comp ratio, to 42 percent in 2011 from 39 percent in 2010. That’s in a year when revenue fell by 26 percent.

Goldman’s earnings release is careful to highlight that overall compensation dropped 21 percent — to $12.2 billion from $15.38 billion. And Goldman cut bonuses more than its revenue dropped, according to a company spokesman — hence the bad news for Goldman employees. There was also $250 million of severance in the 2011 compensation number from cutting 7 percent of the work force. Without it, the comp ratio was 41.6 percent.

None of that changes the fact that Goldman raised its comp ratio in a year when shareholders’ return on equity dropped to a mere 5.9 percent, about half of what it was in 2010. This excludes the firm’s buyout of Warren Buffett. Add that back, and ROE was a pitiful 3.7 percent in 2011. Overall compensation fell less than revenue while bonuses shrank more. That implies that the fixed part of compensation rose.

While it’s clear that Goldman employees made a lot less this year, one could argue, judging by the firm’s performance, they deserved to. It would be interesting to know if shareholders are satisfied with giving up 42 percent of revenue to employees. Doubtless they’ll weigh the value of having the best and brightest working at their company. But even headhunters working for Wall Street firms are asking where employees would jump to with European banks in trouble, and U.S. players all struggling against the same bad business environment. In the war for talent this is a buyers’ market, but if Goldman is a bellwether, it doesn’t seem as if Wall Street firms are willing to be very aggressive in using their pricing power.

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