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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If employees leave GS, I don’t see how this would make them smaller except in any way other than in terms of the number of employees they have. It’s not like they would take their assets/risks/liabilities with them when they leave.

Posted by sam_browning | Report as abusive

Yes, now that more of the top earners will be allocated GS stock of equal or more value, and now that Mr. Buffett is a major investor– there are more voices and votes in favor of retained earnings (so they can pay more dividends, buy more companies, and buy more of their own stock). This will drive up the value of GS stock, rewarding those that have it. Pay is out, rising stock value is in.

Posted by DavidDavid | Report as abusive

Goldman has earned more profit than MS, so they can pay a lower percentage of their profits in compensation than MS, and still end up paying their employees more. It would make no sense for their employees to leave, just because they’re not getting a bigger share, as they would end up with less money. It’s not like they are partners any more, they gave up those rights when they went public.

If Goldman maintained the compensation ration in light of record profits, that would be unfair to their shareholders. Of course, that wouldn’t be the first time a publicly owned corporation put the interests of their executives over those of the company’s owners.

Posted by OnTheTimes | Report as abusive

I am with David David – the guys who actually make the decisions are paid in stock so suddenly pay to the underlings is actually coming OUT of their pocket rather than INTO it.
Perhaps they lose a few employees but MAYBE the whole of Wall Street follows and suddenly banking pay is more appropriate.

Posted by TinyTim1 | Report as abusive

Can anyone out there in the economy blogosphere explain why we can’t institute simple effective downward pressure on CEO salaries at all public companies through the tax code? Suggestions: 1. All portions (salary, stock, options and perks) would be nondeductible if the total value exceeded an upper limit defined by a set ratio of management to non-management compensation in that company; and 2. Any compensation exceeding the amount determined in #1 would trigger an tax surcharge on the entire net income of the corporation. Idea #1 might even help bring up the levels of non-management compensation to reduce a company’s ratio and allow a higher level of management compensation. Just wondering.

Posted by UMLaw77 | Report as abusive

Those “valuable assets” that ran Goldman and other big banks and investment firms into the ground could easily be replaced with common loan sharks. When was the last time you heard of one of them going bankrupt?

Posted by Pete_Murphy | Report as abusive

UMLaw: We could do that except that CEOs at public companies probably donate more money to their Congressmen than you do. So it’s unlikely.

More substantively, we already do this sort of thing – the tax code is progressive, the amount of cash comp that a corporation can deduct is limited, fringe benefits that discriminate in favor of higher-level employees are more likely to be taxable, etc. We could try to do more of it and see if it start to work, but given the ability and desire of corporate boards to find ways to pay CEOs more regardless of tax and regulation levels, it would probably be fruitless without significant corporate governance changes (see some of Lucien Bebchuk’s writing).

Posted by najdorf | Report as abusive