Goldman Sachs not only top heavy bank; 20% of bank MDs must go

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This week we held our quarterly eFinancialCareers round table for heads of recruitment at investment banks. Among things, attendees said banks simply have too many senior staff.

"We used to have a pyramid structure," complained one human resources professional at an international bank. "Now it's becoming more like a rectangle." Round table attendees said they were looking at various ways of dealing with this issue, including making different classes of managing director - some of whom would be less important (and less highly paid) than others.

Goldman Sachs seems to be suffering from the same problem. Yesterday it was reported that the bank had sent a memo complaining that it had reached a "critical mass" of managing directors (MDs). In response to this mass, Goldman said it will now promote vice presidents to managing director positions once every two years instead of annually, as has been the case in the past. The bank said the new process will not result in twice the number of MDs being promoted biannually.

When asked if biennial classes would remain similar in size to the annual classes, a Goldman spokesperson told eFC that the firm will continue to choose managing directors based on the same criteria it has used in the past. “It all depends on the economy, among other factors,” said David Wells, a managing director in his own right.

Charles Geisst, a professor of finance at Manhattan College in New York City, said banks like Goldman have a big problem on their hands. "Business isn't that good and these senior people will stick around just for the high salaries - they know they're not going to get paid anything like as much anywhere else." MDs at Goldman Sachs are automatically awarded salaries of  $500k, says the WSJ.

Fat salaries are only part of the problem, said Geisst. "In the past, a lot of these senior bankers would have moved into government positions, but there's now so much stigma attached to being an investment banker that it's become harder to go from banking to government now," he added.

Brad Hintz, the ex-Lehman chief financial officer turned analyst at Bernstein Research, has been predicting a clear-out of the senior ranks for some time. In 2011 Hintz said that MDs had swollen to account for 40% of compensation costs. MDs needed to be at the forefront of any layoffs, Hintz advised.

Some banks do indeed seem to be culling the senior ranks. Morgan Stanley, for example, is focusing redundancies on MDs. Barclays is doing much the same. Nomura reportedly reduced its number of senior managing directors from 105 in 2008 to 80 earlier this year, to 71 starting April 1st (thereby cutting nine very senior staff just before their bonuses are paid).

Management consultants often have a role to play in the cuts. At our round table, several banks' HR staff spoke of moves to impose new '8 by 8,' or, '8 by 9' structures on banks, in which managers are defined as employees with at least eight people reporting to them and there are 8 layers of management in total. One senior management consultant who works with banks, speaking on condition of anonymity, said these new structures are popular and that the preponderance of senior staff has become an issue for all firms. "It's an issue wherever I go. Banks promoted far too many managing directors and directors, often simply to retain them. They now have a lot of people with big job titles and big salaries but without the responsibilities that go with that."

The best way to deal with this is simply to make big redundancies, he said: "You have to fire 20% of them, period."

From this perspective, MDs at Goldman look lucky. Rather than clearing out its existing MD ranks, the bank is simply making it more difficult to become a managing director at Goldman in future. This brings risks of its own. It could cause motivational problems among Goldman's enormous population of vice presidents hoping for promotion. It's worth bearing in mind that one of the big gripes of Greg Smith, the ex-Goldman VP who wrote a tell-all book last year, was his failure to get promoted to MD on successive occasions. More Greg Smith's could emerge from Goldman after yesterday's changes.

Roy Smith, a professor of NYU Stern and a former partner at Goldman Sachs, said Goldman's decision to promote biannually makes sense from an efficiency perspective. Goldman already selects its partners once every two years and this saves, "a lot of time, bother and stress," Smith told us. "I don't know if Goldman Sachs is overweight senior staff, but I would seriously doubt it," Smith added. "If it were, its compensation ratio would be much larger."

-Beecher Tuttle in New York contributed to this story.