Following yesterday’s conference call to discuss its fourth quarter results, we have a little more colour on what’s happening there.
Last year Goldman was very generous with its cash bonuses: we reported that non-MD level non-code staff received just 20% of their compensation in stock.
This year, Goldman's cash compensation could be down quite considerably.
David Viniar said during yesterday’s call that: “Current year discretionary compensation declined significantly more than revenue,” but that deferred compensation was flat year-on-year.
Revenues at Goldman were down 26% last year and total compensation was down 21%. When questioned further, Viniar said: “If deferred comp is flat, and the whole amount was down 21% and part of it was not down at all, then the rest of it has to be down a lot more than 21%.”
The implication is that cash bonuses have been slashed.
Last year, Goldman aimed initially to cut $1.2bn in costs. This was later increased to $1.4bn.
With a compensation ratio of 42% and pay averaging $367k, a cost reduction of $1.4bn implied Goldman needed to get rid of 1,640 people. In fact, Goldman's headcount fell by 2,400 last year. Rather than a smaller number of cutting senior staff at the top of the pay scale, this seems to suggest it’s been cutting a larger of cheaper ones.
Did Goldman pay lower severance costs to the people it let go in the last quarter?
Over 2011 as a whole Viniar said severance costs totalled $250m. With headcount down 2,400 this implies payouts averaging $104k each. However, in the fourth quarter 900 people were let go and severance totaled only $50m, suggesting each departing individual was paid an average only $56k.
In reality, however, $56k per head may be standard severance pay at Goldman Sachs. The figure for the change in Goldman's headcount for the full year is net and will therefore include hiring (suggesting redundancies were higher than they seem). In the fourth quarter, the headcount change is more likely to be true to the number of redundancies: Goldman is unlikely to have added many staff at this stage of the year.
Goldman aims to cut $1.4bn from costs. Viniar said this has been pretty much achieved already. “We'll closely monitor our expense run rate and make further adjustments as necessary,” he said, whilst also claiming that it’s still unclear whether revenues are going to be lower permanently: “So is it cyclical? Is it secular? That's a very difficult question to answer.”
“We're starting to see a little bit less competition in the few transactions that are out there. So from a competitive position, it actually feels pretty good,” said Viniar.
Glenn Schorr, Nomura’s banking analyst, says this hope of seizing market share may prevent Goldman making additional redundancies. “While investors would like management teams to more dramatically reduce expenses in the near term to offset the revenue declines, we think management teams are trying to play for a cyclical rebound and potential market share gains as some large European players downsize and/or exit businesses,” he says.
However, Schorr also thinks that if revenues don’t come through soon, there could be some big redundancies. “We think that if capital markets revenues don’t pick up a bit in the first half of 2012, management teams (including Goldman) will take more significant restructuring actions in the second half of the year,” he adds.
There’s not as much demand for Goldman Sachs bankers as there used to be, but a good Goldman banker is still eminently poachable.
“Is there the same level of competition for everyone?” Viniar pondered. “The answer is probably no. But for the best people, for the really good talent, there is a high level of competition within -- from our traditional competitors. There's a high level of competition from what you call the shadow banking industry, from other places. It's true outside the US and in the US.”
“As far as trends and structural growth, again, things are so muted, have been so muted over the last half of last year that it's very hard to pick those out,” said Viniar.
He also said, opaquely: “Over time, there have always been secular changes in our business, and I think we'll go through some secular changes now in how we deliver our services. I think the services that our clients want that - you've heard us talk about this. The advice, the capital, the liquidity, the risk management, the asset management, I think those services are still going to be the same services.”