Why is Goldman Sachs so generous in its compensation? Some might say the answer is easy: It's arguably the most successful investment firm on the street. But let's dig a bit deeper
First, Goldman Sachs makes more money than any other investment bank. In 2006, net revenue per employee was $1.4 million, compared to $678,000 at Lehman Brothers. As a proportion of revenue, compensation costs were 43.7 percent, lower than at most other banks.
Second, Goldman works on bigger deals. Dealogic says the average Goldman's average M&A deal in 2006 was worth $2.9 billion. This compared to $2.6 billion for Morgan Stanley, $2.5 billion for Merrill Lynch and $2.1 billion at Credit Suisse. Obviously, bigger deals mean bigger fees: Last year, Goldman earned 35 percent more in M&A fees than Morgan Stanley, its nearest rival.
In addition, Goldman does more trading and risks more of its own capital: Trading and principal investments accounted for 74 percent of total first-quarter revenues this year. Profitable traders are expensive beasts, but they can generate plenty of profits for their employers.
If you don't believe us, here's what the experts say:
"They are smart, well-connected risk takers," observes Dave Hendler, an analyst at independent research firm Creditsights. "They pay more, simply because they make more. And as a trading house, they get results quicker than houses that focus on M&A deals, which are a slower process and can take months to close."
"Goldman pays more because they're involved in more profitable activities," says Dick Bove, an analyst at Punk Ziegel & Co. "At Goldman, there are a lot of traders on some pretty big packages. At Merrill Lynch there are 15,000 people involved in selling stocks and a whole bunch of support people working for them earning $50,000 to $60,000 a year."
He sums up: "Goldman works on bigger deals, does more deals, and has a bigger fee base."