Goldman Sachs pays more than Morgan Stanley. We know this because when the two banks release information about compensation for their regulated staff in London, Goldman Sachs pays nearly three times as much per head ($2.8m vs. Morgan Stanley’s $1m). Similarly, pay per head for the average employee at Goldman Sachs in London is high at around £485k ($633k) and Morgan Stanley has historically paid half as much.
Why does Goldman feel the need to be so generous? CFOs like Harvey Schwartz and David Viniar have long held that it’s because everyone wants to hire Goldman talent, and that this talent leaves the firm each evening and needs to be incentivized to return the next day. “We live in a competitive environment,” said Viniar five years ago. “We still have people leaving for multi-year offers away from us, some from our competitors, some from other industry participants.”
In other words, Goldman has no choice but to pay.
There’s some truth in this. Goldman allegedly paid its London-based emerging markets traders badly last year, and many have since left for rivals with big aspirations. However, Goldman’s generosity goes deeper than employee exceptionalism. As a former partnership, Goldman has rewarding employees ingrained in its DNA. As a former partnership led by a former trader, it also particularly values the contribution of senior employees in the front office.
Morgan Stanley has none of this baggage. It’s a publicly listed firm run by a former management consultant. Therefore, while Goldman Sachs preached the need to pay staff and keep them on-side, Morgan Stanley CEO James Gorman’s opening gambit after becoming CEO in 2012 was that bankers who didn’t like their bonuses could leave. This was subsequently softened when Morgan Stanley bankers did just that, but the underlying sentiment remains: Morgan Stanley’s big names don’t dictate their pay; Goldman’s do.
The discrepancy is clear when it comes to compensation ratios. Under Gorman, Morgan Stanley has slashed the proportion of revenues it allocates to employees in its institutional securities business (investment bank) since 2014. Under Lloyd Blankfein, Goldman Sachs has achieved more of a gentle drop. As a result, Goldman allocated 500 basis points more of revenues to employees than Morgan Stanley in the first half of this year. If Goldman employees were to receive a revenue share similar to Morgan Stanley’s, the firm’s wage bill would need to fall by 12%.
Instead of falling, though, pay at Goldman Sachs is rising. As we reported yesterday, compensation per head at the firm rose 11% year-on-year in the first half. It helps that profits were up 34% on the previous year, but with fixed income sales and trading revenues collapsing, Goldman’s pay rise has a faint whiff of desperation: even if it wanted to, it might struggle to cut compensation now. By comparison, Morgan Stanley’s fixed income trading business has the wind behind it. For the first time ever, it’s now bigger than Goldman Sachs’s and is growing at a rate far exceeding U.S. rivals.
If you want to work for the market leader in FICC, it looks like Morgan Stanley. Gorman can get away with paying less. Goldman Sachs needs to pay less, but can’t.