Bonus cuts and job losses: A painful new year for Goldman

Goldman Sachs CEO David Solomon did little to spark any festive cheer at the investment bank’s lower Manhattan headquarters.

The mood soured this month as news leaked that Goldman was preparing to cut nearly 4,000 staff and was considering cutting bonuses for investment bankers by at least 40 per cent.

“I’m dreading the conversations I’m going to have with my team,” said one veteran Goldman banker, in anticipation of the layoffs.

The cut is a stark reversal from less than a year ago, when Solomon delivered record 2021 results for shareholders and employees enjoyed huge bonuses.

Since then, profits have plummeted at investment bank Goldman, it has pulled back from an expensive foray into retail banking and faced a series of devastating accusations over its treatment of female employees.

Although it’s been a disappointing year for much of Wall Street, the looming pressure on jobs and bonuses is set to run deeper yet at Goldman, long seen as the finest of the big investment banks.

In an interview with the Financial Times, Goldman chief John Waldron defended cost-cutting, citing fears of a recession in 2023, and said he expected other companies to do the same in the coming months.

“Everyone I know in my work or in David’s job is doing the same thing. The outlook is even more challenging. The outlook is even more challenging,” said Waldron, 53, a senior lieutenant to CEO Solomon since he took the top job in 2018.

“But most of the companies I talk to, financial services or otherwise, are not only hiring, they’re cutting staff,” he said. Waldron would not comment on any of the reported numbers about job cuts or bonuses.

In the midst of a testing year, Goldman executives have been keen to talk about the market share gains made this year through the market-leading mergers and acquisitions franchise, as well as the solid earnings in its trading business. Goldman’s share price has also outperformed the benchmark S&P 500 this year.

“You’ll struggle to see blooms on that rose, but we’ve accomplished a lot in 2022,” Waldron said.

When business slows down, banks like Goldman usually manage costs by cutting bonuses. Job cuts are usually limited to a modest cut for low performers each year.

Goldman Sachs’ planned layoffs — up to 8 percent of about 49,000 employees — go beyond the usual execution. They came after the bank expanded faster than most of Wall Street over the past three years.

Wells Fargo banking analyst Mike Mayo estimates that Goldman’s headcount, excluding any additions through acquisitions, grew 20 percent between the first quarter of 2020 and the third quarter of this year — twice the pace of the broader industry.

“In 2020, Goldman was one of the few large banks that committed not to lay off workers during the pandemic,” Mayo said. In 2021, business is booming. So now you have partial compensation.”

The bank’s hiring spree helped push Goldman’s efficiency ratio — a measure of the bank’s operating expenses against its net revenues — to 63.8 percent this year, analysts estimated, up from 53.8 percent in 2021, a bigger jump than its rivals.

The planned cuts reflect Goldman’s heavy reliance on investment banking and trading for profits, despite Solomon’s four years of trying to build a business with less volatile revenues.

The bank is consolidating its asset and wealth management businesses in an effort to generate steady fee income to help offset more windfall investment banking revenue and trade proceeds.

Despite the bank’s efforts, analysts expect Goldman’s revenue and profits have declined faster this year than more diversified competitors such as JPMorgan Chase, Morgan Stanley, Bank of America and Citigroup.

By contrast, Goldman posted higher revenue and earnings growth than its peers in 2021, the final year of a bull market that has lasted more than a decade.

Solomon’s total pay last year was $35 million, making him the highest-paid CEO of a Wall Street bank alongside Morgan Stanley boss James Gorman in 2021.

Line graph of year-over-year percentage change in full-year revenue shows Goldman's revenue declining the most among peers in 2022

Some at Goldman are also ready for senior staff to step down due to disappointment over wages.

Maybe we should rebuild [parts of] A senior banker at Goldman Sachs said:[Solomon] He wants to run the business as well as he can. He’s taking some real risks around that.”

Waldron has defended the approach to pay, arguing that employees should consider compensation over a longer time frame, and also noting that Goldman’s bonuses last year outperformed competitors.

“We paid our people very well last year, deservedly so. Our people knew that this year, in a normal year, bonuses would be down but if you look at the two-year average, they would have made more.” [versus peers]Waldron said.

Still, the depth of the cuts has surprised some of Goldman’s biggest rainmakers, especially traders in its Global Markets division who have been told their bonus pool could drop by more than 10 percent, according to a person familiar with the matter. . The company generated more than half of Goldman’s revenue in the first nine months of 2022.

One Goldman banker said the bank’s relatively large size compared to other high-paying firms on Wall Street, such as private equity firms and hedge funds, means the bank’s stars are at risk of poaching. “Millennium or Citadel can overpay two or three traders. GS can’t match where they have to overpay 50 traders,” the banker said.

Goldman Sachs Chairman John Waldron: “We’ve accomplished a lot in 2022” © Goldman Sachs

Goldman’s cost base is likely to be on the agenda on January 17, when it reports fourth-quarter earnings. Six weeks later, Solomon will host the bank’s second Investor Day where he and his senior executives will give more details about the bank’s new structure following the reorganization that took place in October.

The investor day will be an opportunity to convince shareholders that Goldman Sachs can meet its targets for returns in 2023 during a period when many expect a recession.

“It looks like the macro environment may not improve much, at least for the first couple of quarters,” said Kush Joel, senior research analyst at investment manager Neuberger Berman, which owns Goldman shares. “That’s why there needs to be a greater focus on managing expenses and efficiency.”

Meeting the bank’s profitability targets is critical to winning Goldman a higher stock market valuation. The price-to-book ratio, a metric that compares a company’s share price against its net asset value, has lagged behind competitors like Morgan Stanley for years.

“Investors like cost control and expense discipline,” said Christian Polo, banking analyst at Autonomous Research. “The broader question eventually becomes, what is the long-term story for Goldman Sachs?”

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