Goldman Sachs pay is falling fast. Here’s why

If you go to work for Goldman Sachs, you’ve probably got one eye on the amount you’ll be paid. After all, Goldman Sachs pays well: in 2014 its average employee earned $379k (£243k). Pay at Goldman is, however, falling.

In the second quarter of 2015, compensation at Goldman Sachs fell by 10% compared to the second quarter of 2014. Average pay per head for those three months was ‘just’ $109k compared to $121k a year earlier.

Before existing Goldman staff start worrying about their year-end pay packages, we’d like to point out that the pay cut likely has something to do with Goldman’s geographical hiring trends. These days, when Goldman recruits a new employee it avoids expensive places like London (where GS pay is on average 27% higher than elsewhere) and NYC and goes straight for Salt Lake City or Mumbai instead.

During today’s call to accompany the bank’s Q2 results, Goldman CFO Harvey Schwartz said a full 75% of Goldman’s hires in the past quarter were made to these sorts of ‘low cost’ locations. The bank hired 500 people in the three months to June.  According to Glassdoor, the average salary for an analyst at Goldman’s Indian operations is $15k. At Salt Lake City it’s $49k. At Jersey City it’s $66k. And in London, it’s…$78k (£50k).

In other words, by recruiting 400 people spread equally between Mumbai and Salt Lake City instead of Jersey City and London, Goldman just spent $12.8m instead of $28m on new hires. That structural change alone cut the wage bill for new staff by 57%.

Of course, there’s more to Goldman’s falling Q2 compensation costs than the location of 400 new hires. – The firm employs 34,900 people in total and the total compensation bill in Q2 was $3.8bn, so the new recruits are a drop in a much larger ocean.

Goldman’s changing business mix is also likely to have something to do with its dwindling pay. Equities revenues boomed in Q2, and were up a massive 63% year-on-year. But equities is a comparatively low margin business, and one in which an increasing proportion of execution takes place electronically.

By comparison, revenues in the higher margin fixed income business fell by 28% year-on-year in Q2, partly due to Greek-inspired ‘unhealthy volatility’ (defined by Goldman CFO Harvey Schwartz as the kind of volatility that causes clients to de-risk, as opposed to healthy volatility which encourages clients to trade more.)

Irrespective of the firm-wide average, one set of Goldman staff almost certainly will be earning more this year: the M&A bankers. “Our team is really in the centre of all the M&A dialogue,” declared Schwartz on today’s call. Reflecting this, M&A revenues were up 62% year-on-year in the second quarter. M&A revenues at J.P. Morgan rose by just 17% over the same period.

(Photo credit: Magdalena Roeseler)