Is Goldman rebasing comp at a lower level?

By Hugo Dixon
July 20, 2010

Is Goldman Sachs rebasing compensation at a lower level? For the second quarter in a row the investment bank’s compensation ratio has been only 43 percent. In the past, Goldman paid out around 50 percent of revenue to staff. For ordinary mortals, the numbers are still staggering: on an annualised basis, $545,000 is being set aside for each of the firm’s employees. But it does look like Goldman may finally be listening to its critics.

At the end of what was a blow-out first quarter, it was unclear how to interpret Goldman’s relative parsimony. The bumper results meant Goldman could still accrue huge sums for employees despite the lower-than-normal percentage rate. One senior executive said then that it would be reasonable to increase the accrual ratio only if trading in subsequent quarters was poor. Well, the second quarter was rotten. But the ratio didn’t budge.

Part of the explanation seems to be that Goldman has understood how past greed contributed to its recent public relations disaster. It would have been insensitive to jack up the accrual rate just days after paying a $550 million fine in connection with Abacus, a dodgy structured product it sold investors in the boom. Goldman’s failure to show restraint on pay this time last year helped sow the seeds of the backlash inflicted on the industry at the end of 2009 — leading to a UK bank bonus tax which is now costing the firm $600 million.

Sceptics will argue that Goldman will revert to type as soon as politicians take their eyes off the ball. There will certainly be a strong tendency to do so. But new regulations are being introduced around the world which will hardwire more restrained compensation practices: cash bonuses will be smaller and traders will have to repay bonuses when the profits behind them prove unsustainable. Beyond that, it will be down to shareholders to lock in lower pay — with the flipside of higher earnings and dividends.

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PR is a powerful tool, and the GS PR machine is in high gear. It’s enough to make one skeptical of their earnings report, ie whether or not it was doctored up to be LOWER than actual so as to get it off America’s radar for a while. Ya, it’s pretty ‘conspiracy nut’ type talk, but given how much flak they just went through maybe it’s not such a stretch.

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