The Fix for Goldman Sachs Starts With Bloated Paychecks
(Bloomberg Gadfly) -- The easiest solution, the saying goes, is the one staring you right in the face. Goldman Sachs Group Inc. needs to open its eyes and realize the obvious -- its bankers are in need of a well-deserved pay cut.
Last week, Goldman reported results for 2017, its most challenging year since at least the financial crisis. Debt and commodity trading revenue fell 30 percent. Equity trading was down 7 percent. Revenue in Europe was down.
Overall, revenue was up, as was its stock. But rival Morgan Stanley's revenue was up twice as much, and its stock far outpaced Goldman's in 2017, 24 percent to just 6 percent. Worse, Goldman's return on equity slumped to its lowest level in five years. In reporting its results, Goldman called the current environment on Wall Street "challenging."
And yet compensation was up, rising to $11.9 billion from $11.6 billion the year before. Goldman added 2,200 staff members in 2017 for a total of 36,600, so pay per employee dropped. Still, the average payday at the firm, which had its worst year in nearly a decade, came to $323,852.50, including bonuses. That compares with nearly $298,000 at Morgan Stanley. It was lower at Bank of America and JPMorgan Chase. Of course, those firms have bigger lending operations, where pay is traditionally lower.
Goldman has a lot of issues. It missed a shift to index funds and quant-driven, computerized trading that is making its brokerage operations less relevant. Its trading desk remains hemmed in by regulations but also by investors who want the firm to be less risky. A good portion of its gains still come from its volatile private-equity operations, a division that the bank might still have to phase out under current rules. And it's running headlong into corporate and consumer lending, competitive businesses that are unlikely to produce the kind of high returns that Goldman has typically relied on from its Wall Street businesses.
But its persistently high pay, increasingly hard to defend, could be its biggest problem, in part because it saps the firm's credibility with investors. Goldman uses words like challenging on its conference calls and has announced a plans to increase revenue by $5 billion a year. But as long as it's paying an average of nearly $325,000 to everyone with an employee ID, it's hard to believe that Goldman's top brass truly appreciates the problems it faces. What's more, higher revenue will only go so far.
Goldman's biggest expense is pay. Its compensation bill last year was more than 12 times its entire tech budget. If Goldman were to cut that expense by 10 percent, it would save nearly $1.2 billion. What's more, based on last year's tax rate, the bank's ROE would shoot to 12.9 percent, the highest in years. And the average total pay at Goldman would still top $291,500. Cut comp by 20 percent, and Goldman's ROE would clear 14 percent, which would get it pretty close to the 15 percent that used to be its target just a few years ago. Average pay would drop to just more than $259,000.
The argument against this, of course, is the retention of valuable employees. Rainmakers go where the pay is. But given the recent drought at Goldman, it could stand to lose some of its bankers, which would allow it to increase pay for its remaining best performers while still cutting its biggest expense.
Goldman has always justified its high pay by saying it's the only way it can keep its No. 1 spot on Wall Street. Clearly, that hasn't worked out. The longer Goldman sticks to that strategy, the more evident it will be that the bank puts its executives' and employees' bank accounts first and shareholders and accountability last.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Stephen Gandel is a Bloomberg Gadfly columnist covering equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.
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