Cutting pay at Goldman

By Felix Salmon
January 21, 2010
a stunning U-turn, putting aside exactly $0 for compensation in the fourth quarter, and bringing its compensation ratio for the year down to an all-time low of 36%. By contrast, the same ratio at seemingly-struggling Morgan Stanley is 62%.

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Goldman Sachs has always prided itself on leading the investment-banking pack in terms of compensation. Because it’s richer and more successful than anybody else, it can pay more than anybody else can afford, forcing them to spend money that would be better used elsewhere on bonuses. That in turn improves its competitive position. It’s a bit like the US-Russia arms race during the cold war.

But now Goldman has done a stunning U-turn, putting aside exactly $0 for compensation in the fourth quarter, and bringing its compensation ratio for the year down to an all-time low of 36%. By contrast, the same ratio at seemingly-struggling Morgan Stanley is 62%.

This could, conceivably, be a game-changer. Banks have always said that they need to pay top dollar in compensation, lest their most valuable assets walk out the door. But it simply isn’t credible that many if any Goldman Sachs employees will leave voluntarily after getting bonuses this year which were lower than they might have been led to expect. And if Goldman proves that employees will stay when bonuses are cut — well, that could trickle down to the rest of Wall Street, too, which is much more desperate to cut compensation expenses.

The question, of course, is whether this move by Goldman is a one-off publicity stunt, or whether it genuinely thinks that a compensation ratio less than 40% is sustainable in the long term. Given the fact that the government is likely to put a lot of pressure on Goldman to shrink, my feeling is that the bank can keep compensation (relatively) low more or less indefinitely. If bankers leave, fine, we want to get smaller anyway. Whether Goldman will keep compensation low, of course, is another matter entirely: doing so would fly in the face of the Goldman culture in general, and the culture of CEO Lloyd Blankfein in particular. But maybe the Squid feels that it has no choice, given political realities.

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