Why does Goldman pay so much?

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Despite allegations that we talk too much about Goldman Sachs (and following a request from a reader), here's why Goldman is so generous.

1. It makes more money. Net revenues per head in 2006 were $1.4m (725k). This compared to $678k at Lehman Brothers, for example. At 43.7% as a proportion of revenues, compensation costs were lower than at most other banks on the Street (shareholders are not being fleeced).

2. It works on bigger deals. According to Dealogic, the average M&A deal involving Goldman in 2006 was worth $2.9bn. This compared to $2.6bn at Morgan Stanley, $2.5bn at Merrill Lynch and $2.1bn at Credit Suisse. Bigger deals mean bigger fees: last year, Goldman earned 35% more in M&A fees than Morgan Stanley, its nearest rival.

3. It does more trading and risks more of its own capital. Trading and principal investments accounted for a massive 74% of total first-quarter revenues at Goldman Sachs this year. Profitable traders are expensive beasts, but they can generate plenty of profits for their employers.

And if you don't believe us, here's what the experts say:

"They are smart, well-connected risk takers," affirms 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 pay 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 $50k to $60k a year.

"Goldman works on bigger deals, does more deals, and has a bigger fee base," he adds.

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