When Goldman Sachs announced that it had set aside nearly 50% of its revenues for compensation, jaws dropped.
It looked like we were not only returning to the boom year bonuses many thought we gone with the financial crash, we were surpassing them. In recent years, Goldman had been known to pay its employees a far lower percentage of the revenue than rival firms where around 50% was standard.
But that might have been a head-fake. Analysts at Pali Capital say that Goldman will set aside less money for compensation in the second half of the year, leaving more on the table for shareholders, DealBook reports.
This won’t necessarily translate into broke bankers. Pali also expects Goldman’s revenues will jump as merger activity rebounds (something that happens at the end of every recession) and the IPO market revives. So the guys and gals at Goldman will be getting a smaller slice of a bigger pie. What’s more, most Goldman employees hold Goldman stock, so if the stock price rises on news that the per cent of revenues going to shareholders is increasing, the Goldman employees also benefit.
In their report, Pali’s analysts predicted that Goldman might choose to set aside 40 to 50 per cent less cash in the fourth quarter for employees as a result of what they described as compensation “complaining” and political pressure surrounding this hot-button issue.
That would leave a lot more money for profits. The analysts calculate that if Goldman pays out about 28 per cent of its fourth-quarter revenue to employees, the firm’s earnings per share would skyrocket from the average estimate of about $4.34 a share to $6.37 a share.
Cutting compensation is usually seen as risky, because firms may see top employees defect to rivals. In deciding on where to set its compensation, Goldman will need to weigh the interests of at least three constituents — its workers, its shareholders and public opinion.
This seems to be a bet on the part of Goldman that other firms won’t succeed in poaching its best talent. This is a bet we’d take too. With concern over Pay Czar caps and the profit potential of rival firms, most employees will probably decide to stick with Goldman. Even hedge funds aren’t hiring the way they used to, taking away another source of competition.
In short, it looks like Goldman is set to win another battle on Wall Street.
One question: how will the Goldman haters spin this against the firm?
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.