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 On Thursday, Goldman reported a 25 percent increase in quarterly
revenue, but the money it set aside for compensation and benefits
rose only 18 percent from the same period a year earlier. The amount
of money it has set aside for compensation is more or less
unchanged, as is the average compensation per employee, at around
$320,000 for the first nine months of the year.
Sources familiar with the matter inside Goldman Sachs described the
restraint as a sign of the shifting mentality about bonuses at the
bank: it wants to tightly control compensation, even if it has good
quarters with big revenue gains. That translates to bigger profits
for the bank, and more money for shareholders.
Compensation experts say similar changes are happening across Wall
Street.
Morgan Stanley <MS.N>, which is Goldman's chief investment banking
rival, has set a maximum target for compensation as a percentage of
revenue in each of its business lines. Its progress in curbing
compensation may be a key part of its third-quarter results, which
are due out on Friday.
"There is a desire to share more with shareholders, and that means
holding the line on compensation expense," said Rose Marie Orens, a
pay consultant for financial firms at Compensation Advisory
Partners. "Just because revenue is up 20 percent, that doesn't mean
bonuses will necessarily be up 20 percent."
It wasn't always that way. In the third quarter of 2007, for
example, when the financial crisis was in its preliminary stages,
Goldman Sachs's revenue rose 63 percent from the same quarter a year
earlier. But its compensation expense rose 67 percent.
The bank has taken myriad steps to cut compensation costs. It has
let dozens of high-earning partners walk out the door to make room
for more junior employees who earn less. It has also moved as many
jobs as it can to cities like Bangalore in India, and Salt Lake City
and Dallas in the U.S, where wages are lower than in places like New
York or London.
CAPITAL RULES
Before the crisis, Goldman often boasted an annualized
return-on-equity - a measure of how effectively the bank wrings
profit from shareholder money - of 30 percent or higher. More
recently those figures have been between 10 and 12 percent. Other
banks, including Morgan Stanley, are still struggling to get returns
above 10 percent, the minimum that analysts say is required to meet
their cost of capital.
Those returns have been hurt by new capital rules that make it more
expensive to keep risky assets on balance sheets. Weak trading
volumes have also kept a lid on revenue growth. A study in July from
consulting firm Federal Financial Analytics estimated that new rules
cost the six biggest U.S. banks some $70.17 billion in 2013, about
double banks' regulatory and capital costs in 2007, just before the
financial crisis.
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Some of Goldman's peers have tried to boost returns by getting rid
of assets that can force the bank to hold more capital under new
regulations, and exiting some types of trading, but Goldman has
stuck with those businesses. Instead, it is trying to drive returns
higher by cutting costs and hoping it can capture more trading
revenue and increase its ability to charge more for its services.
As the bank boosts profits, it can afford to buy back more shares,
which boosts its return on equity. It can also raise dividends, a
step it has taken four times since 2012, an unusual move for a bank
that had previously shown little interest in the size of its
dividend payments.
Several stock analysts who cover Goldman Sachs commented on its
compensation move on Thursday, saying it was a big reason the bank's
earnings were better than expected.
JPMorgan analyst Kian Abouhossein said Goldman's adjusted
compensation ratio was 7 percentage points lower than he had
estimated it would be.
"Fourth-quarter results will tell, but we would be surprised if it
(the ratio) were not down again for the fourth year in a row," said
Chris Kotowski, an analyst with Oppenheimer & Co.
One employee on a Goldman trading desk who spoke with Reuters noted
the gap between its revenue increase and compensation increase,
taking it as a sign that, even if the fourth quarter produces great
results, bonuses for this year's work might be disappointing.
"People now understand you're not going to double your compensation
every year," said Brian Byck, a recruiter who works with traders and
sales staff at Odyssey Search Partners.
(Reporting by Lauren Tara LaCapra; Editing by Dan Wilchins and
Martin Howell)
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