David Solomon will be receiving a pay rise when he becomes CEO of Goldman Sachs. Currently paid $1.85m, Solomon will earn $2m a year when he assumes the leadership mantle on 1 October. Goldman's traders may well look on in envy: while Solomon is earning more, the fear is that they will be earning less and less.
It's a fear that's been expressed several times this year. Juniors who left Goldman's rates team in the first quarter complained to us that the firm seemed to have a new approach to rewarding its risk takers and that, "only the good guys were paid flat". One said that he and others were looking at moving to places where, "remuneration is more directly linked to performance", and that traders were being squeezed while technology investments were expanding, "massively." Nor does the sentiment seem limited to the macro desk: Goldman's equity derivatives traders complained of poor pay too in the last bonus round, and Zerohedge suggested that Goldman's high yield traders were also unhappy with their compensation.
Yesterday's results did little to assuage traders' fears. As we noted yesterday, Goldman's big increase in fixed income trading revenues was not matched by a concomitant increase in money accrued for compensation. Instead, the ratio of revenues allocated to compensation declined to 37%, down from 41% one year previously. If Goldman had accrued compensation at the previous year's rate, pay for employees would have been around $390m higher.
This has not gone unnoticed on the Goldman trading floor. Nor has it gone unnoticed among banking analysts. During yesterday's earnings call, Goldman CFO Marty Chavez was quizzed on the compensation ratio being so low. "I don’t remember if and when there was ever a lower second quarter comp ratio," said Glenn Schorr at Evercore, while Morgan Stanley's Betsy Graseck argued whether the squeeze on employees was a function of Goldman trying to maintain a return on equity in excess of 12%.
For Goldman traders, Chavez' response was both reassuring and not. He told Schorr that Goldman pays "for performance" and to "attract and retain talent". But to Graseck Chavez said, "as we build and scale our businesses and apply more automation everywhere, it’s natural to think about comp and non-comp holistically".
In other words, the money that's set aside for humans and machines at Goldman is interchangeable. Chavez's comment is likely to raise a red flag to traders at Goldman who already fear that Chavez's technology background is encouraging him to over-value automation and undervalue the contribution of human risk takers. Matters could be made worse by the ascension of Solomon, whose investment banking background may make him less sympathetic to the pay gripes of the securities division.
For the moment, then some of Goldman's top traders have been leaving and the firm is hiring more in, typically at the level of executive director or senior VP. It would be wrong to presume that everyone in the securities division is unhappy - insiders in the electronic trading division say things are going very well and business is better than ever.
Even so, Goldman's employees can be forgiven for casting an eye across to Morgan Stanley's results today. The rival U.S. bank achieved a 20% increase in revenues in its institutional securities division and hiked compensation by a similar amount. Nonetheless, moving to Morgan Stanley is unlikely to be a panacea: the U.S. bank only allocated 35% of its revenues to pay.