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.