How Pay At Goldman Really Works

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When Goldman Sachs announced yesterday that the amount it was setting aside for pay had surged 75%, to a total of $6.65 billion for the second quarter alone, the headlines about Goldman employees looking at a $1 million pay day were inevitable.

This year the portion of Goldman’s revenues set aside for compensation has risen to 49%. That’s far higher than the portion Goldman employees got just a few years, when more money went out to shareholders or back into the business. Goldman was notable back then because it was earning so much money that it could grant enormous paydays while leaving a far more money for shareholders than its Wall Street rivals, where the standard comp earmark was 50%. Those days are gone, and the old Wall Street game of halfsies is back.

But those headlines about million dollar pay days aren’t quite right. It’s true that the bank set aside over a quarter of a million per employee for benefits and compensation, a 47 per cent gain over last year despite a 16 per cent headcut reduction. So the bonus pie at Goldman is bigger, and there are fewer people at the table. Less people earning more money is good news for everyone still at the firm.

But Goldman is not an egalitarian institution, and it is certainly not going to be dividing that money up in a way that will see each of its 29,400 get anywhere near a million bucks. Instead, many employees will be paid tens of thousands of dollars, thousands will get hundreds of thousands, and an elite few will be eye-popping figures. The biggest hitters get to eat the most pie.

Goldman doesn’t like to talk too much about how it divides up the pie. In the past, it was happy to have headlines blaring out huge per employee compensation. They might not have been all that accurate, but they were good for morale and good for recruiting. These days Goldman is even shyer about the comp. It’s spokesperson reminded us that a bad quarter or two could result in lower paydays when Goldman gets around to handing out bonuses at the end of the year.

“Personally, I think trying to guess the outcome of a year in the middle of it is bad Karma,” Goldman spokesman Lucas Van Praag said.

But thanks to Duff McDonald’s reporting we already know a lot about how Goldman divides up the portion of the pie it sets aside for revenues. Right off the bat, Goldmans senior executives—known as PMDs for partner managing directors—slice off a huge chunk of the revenue. In 2007, the top guys took around 20% of the total. This means that if compensation comes in at $20 billion this year, that’s $4 billion for Goldman’s 400 or so PMDs.  If these guys and gals divided the money evenly, each PMD would take home a cool $10 million each.

But even among the senior executives, Goldman is not an egalitarian fraternity. As Duff McDonald reported back in 2005, each PMD has a certain amount of “points” in the partnership pool. In a typical year, something like a quarter to a third of that $4 billion gets handed out according to the points system.

Let’s say this year it’s a quarter, leaving $3 billion. What happens to that $3 billion is a yearly source of contention, controversy, rivalry and envy. Basically, the PMDs get paid according to what the really top guys—guys who run entire departments—think they should get. If there’s some secret formula guiding the discretion, no one has ever discovered it.   Certainly, the biggest earners for the firm are favoured. But sometimes weird quirks slip in, like some guy in investment banking who hasn’t done a deal in six months getting an outsized bonus. This is always followed by whispered accusations of favoritism.

So here’s one stark fact about the world: even if you are a PMD at Goldman, you get paid according to the outcome of a highly politicized debate among the firm’s top bosses. You might get a tasty piece of pie, but the size of your cut gets decided behind closed doors.

The guys who find the most favour with the compensation gods will likely take somewhere between $20 million to $40 million. Goldman has to disclose what they pay the executive management team—guys like Lloyd Blankfein and CFO David Viniar. But its not clear yet how the Obama administration’s pay proposals will effect the disclosure of, say, Goldman’s top oil trader. In the past, those are numbers Goldman has tried very hard to prevent the world from learning.

The next level down at Goldman are the executive managing directors. These are folks who didn’t get tapped to join the inner circle of the partnership, but have been at the firm a long time or control a good book of business. They can probably expect to make somewhere between $2 million and $4 million a piece. Part of that compensation typically comes in the form of Goldman stock, which this year could be especially valuable because (despite recent gains) Goldman is well below its historic highs.

The rest of Goldman’s financial employees—the vice presidents, associates and analysts—get paid according to their performance evaluations. This includes the not only their individual performance, but also the performance of their particular group—fixed income versus equity, for example—and of their desk. The rank-and-file are basically scrapping with each other for whatever crumbs are left once the partners and executives have had their fill. But, then again, those crumbs are worth hundreds of thousands of dollars.

In past years, Goldman has had to watch out for other firms or hedge funds poaching their better employees, so they juiced up these numbers a bit. But in most areas where Goldman is doing so well, there isn’t as much competition for talent these days. So Goldman might get conservative with these lower level employees.  Balancing against this, however, is the fact that there are fewer of these rank-and-file employees after recent layoffs. Which means that Goldman can afford to pay the soliders who have survived in the trenches more.

Those who get pay days smaller than their peers at Goldman typically take it as a sign that they should start looking for a job elsewhere. For some, Goldman doesn’t wait for them to see the sign. Traditionally, Goldman just fires those in the bottom 5% of the performance evaluations.

So, sure. Goldman has set aside compensation expenses that, when annualized, amount to close to $1 million per employee. But most of that is going to Goldman’s inner circle, with far smaller paydays going to that cute girl you know on the wealth management desk.

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