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Why Goldman Sachs can't afford its people

Something's got into Goldman Sachs. Its third quarter results, released today, reveal that it's been doing rather a lot of hiring.

Over the past year, Goldman has added 3,700 people, an increase of 12%. Over the same period, however, revenues have fallen 14%. Worse, net income is down 30%.

Unsurprisingly, this is leading to carefulness when it comes to compensation. Accrued pay per head for the first three quarters currently comes in at $371k, down from $527k for the same period last year.

Nor may compensation rise any higher in the three months to January. In 2009, Goldman had negative compensation accrual in the fourth quarter, leaving average pay per head for the full year lower - at $498k.

If mean compensation does wind up at $371k per person for 2010, Goldman bankers will be able to take solace in the fact that it's higher than the bleak times of 2008 ($316k). But it will be plenty less than the $661k of 2007.

Compensation is rising relative to income

On some measures, Goldman needs to cut its wage bill still further.

While the bank is trimming compensation as a percentage of revenues (47% in 2009 to 43% in 2010), compensation is creeping upwards in relation to profits.

Hence, in the first nine months of 2009, compensation was 2 times higher than net income. However, in the first nine months of 2010, it was 2.2 times higher.

Even if shareholders are happy to see profits depleted by higher pay, a degree of headcount reduction seems to be in order. Alternatively, Goldman bankers may have to inure themselves to lower remuneration in future.

Following this year's hiring, and assuming Goldman continues to accrue compensation at the same rate in the fourth quarter, it will need to make 265 people redundant to achieve the same level of compensation per head as last year. This is the optimistic scenario - if, like last year, Goldman accrues nothing in terms of compensation in the fourth quarter, it would need to make 9,000 redundancies in order to pay the average employee on a par with 2009.

AUTHORSarah Butcher Global Editor
  • Ze
    20 October 2010

    Moved to tears by the conundrum GS find themselves. As so well documented in M.Lewis' "the big short", now the truth has come out GS & Co. will find it more difficult for a while to construct vehicles that allow them to profit from the greed and stupidity of their clients. Memories, unfortunately, are short, and the good times will return for them, in another disguise, and cost many of us dear.

  • Al
    19 October 2010

    Mr Provincial Town aka AliDesai, do you have any comments to add about your boyfriend Charlie who used to work at Goldman Sachs and run a bunch of highly leveraged strategies before he moved to your Small Provincial Town and got married to you? Or has someone found out who you are and shot you between the eyes and burned your body?

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