Compensation Spending Down at Goldman, Up at Smaller Firms

Smaller investment banks, broker-dealers have to keep up in terms of IT, legal and financial expertise

CEO Lloyd Blankfein of Goldman Sachs. (Photo: AP) CEO Lloyd Blankfein of Goldman Sachs. (Photo: AP)

Goldman Sachs (GS) has made strides in its stated mission to cut costs, as the firm ended 2011 with one of the lowest compensation-to-revenue ratios of the publicly traded investment banks, 42%, according to SNL Financial analysis released Tuesday. Morgan Stanley (MS), which has been letting lower-producing advisors go and enacting other steps to lower costs, is second lowest at 51%.

Meanwhile, smaller organizations had much higher compensation-to-revenue figures: Cowen Group (COWN), at about 75%, had the highest ratio, while Raymond James Financial (RJF), Evercore Partners (EVR) and Lazard (LAZ) all ratios of roughly 70% in 2011.

This could, experts say, be due to the fact that regardless of the size of the investment and broker-dealer operations, a costly team of technology, legal, compensation and investment experts is required for such business.

SNL says its report excludes investment banks with large retail branch networks like Bank of America (BAC), Citigroup (C) and JPMorgan (JPM), and the research focus is limited to those companies that have common stock trading on the NYSE or NASDAQ.

According to report authors Thomas Mason and Sam Carr, Goldman Sachs had set a target last year of $1.4 billion in annual run-rate expense reductions, which included both compensation-related and non-compensation-related expenses. It reduced its total operating expenses by $3.63 billion in 2011, representing a roughly 14% decrease, with a $3.15 billion reduction in compensation and benefits expense.

Yet, while Goldman's compensation and benefits expense declined, its headcount did, too. The firm's total staff at year-end 2011 was 33,300, a drop of about 7% compared with the same point in 2010. After adding in consolidated entities held for investment purposes, headcount was down by roughly 10%.

As Goldman also points out in its annual filing, the ratio of compensation to net revenues was up from 39% in 2010. During the period, net revenue declined, falling to $28.81 billion in 2011 from $39.16 billion in the year before.

For its part, Cowan has said in its public filings that its 5% increase in total compensation was offset by only a 1% increase in revenue last year, when its average headcount grew by 2% and its employee compensation and benefits expense expanded by $8.8 million.

Lazard appeared to be a particularly lucrative place to work, the SNL report notes. Compensation per average employee at Lazard was about $546,000 for the period, although such figures can potentially be misleading, as not all employees are paid in equal proportions. 

As with other M&A specialists like Evercore Partners and Greenhill & Co., this ratio tends to favor companies that have relatively small staffs. For instance, Lazard reported only 2,511 total employees as of the end of 2011, less than one-tenth the size of Goldman's total employee base. Digging a little deeper shows that the number of managing directors at Lazard is a small fraction of the firm's total headcount, standing at 222 as of Dec. 31, according to the company's annual filing.

Other Ratios, CEO Pay

In terms of compensation-to-total expenses in 2011, Raymond James, which declined to be interviewed about the issue, topped the list at about 77.5%. Morgan Stanley comp-to-expense ratio was roughly 62%.

Smaller broker-dealers like Stifel (SF) and Jeffries (JEF) came in with comp-to-expenses of about 62% in 2011, while Goldman Sachs and Piper Jaffray (PJC) had comp-to-expense ratios of about 50% last year.

Goldman Sachs ended the year with a market capitalization of about $91 billion compared with Morgan Stanley’s $78 billion, Jeffries’ $3.5 billion, Raymond James’ $3 billion, Stifel’s $1.4 billion, Lazard’s $867 million, Piper’s $750 million and Cowan’s $510 million.

Recent CEO compensation, as tracked by Morningstar, for these organizations is ranked accordingly at: $69.7 million for Goldman CEO Lloyd Blankfein, $10.5 million for Morgan Stanley CEO James Gorman, $6.4 million for Jeffries CEO Richard Handler, and $3.7 million Raymond James CEO Paul Reilly, for instance.  

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