Goldman boosts returns to shareholders through layoffs
Goldman Sachs Group Inc paid a smaller portion of its revenue to employees in 2012 as it laid off staff, signaling that management at the top Wall Street bank may be ceding power to the shareholders who supply the capital.
The bank set aside just 37.9 percent of its 2012 revenue for compensation, the second-lowest proportion since Goldman went public in 1999. But pay per employee rose because revenue was up and layoffs reduced staffing levels.
Lower compensation combined with big revenue gains helped Goldman beat analysts' earnings expectations for the fourth quarter. The bank on Wednesday said profit nearly tripled, boosted by higher stock and bond values, and increased revenue from trading, dealmaking and money-management.
"We were not expecting as much revenue in the capital markets as what they were able to achieve," said Joe Terril, president of the St. Louis-based investment firm Terril & Co. "And management appears to be retaining quality people without giving all the revenue away in the form of compensation."
Goldman posted quarterly earnings of $2.8 billion, or $5.60 per share, up from $978 million, or $1.84 per share, in the same period a year ago.
Analysts had expected the New York-based bank to earn $3.78 per share, on average, according to Thomson Reuters I/B/E/S.
Goldman shares were up 2.4 percent at $138.91 in early trading.
A significant part of Goldman's earnings boom came from improvements in market values in the stock and bond markets, as well as increased activity from clients.
The bank said it took in "significantly higher" revenues from credit products and mortgages in its bond-trading business. Its investing and lending division, which mostly earns money from higher values on Goldman's own stock and bond investments, reported nearly $2 billion worth of revenue.
But gains were broad, with revenue up across each of Goldman's business lines, from investment banking to investment management. Overall, revenue rose 53 percent to $9.2 billion.
The bank said compensation expense, typically the biggest cost for Wall Street firms, fell 11 percent from a year ago. The expense was just 21 percent of net revenue, roughly half of what the firm usually pays out to employees.
In 2009, a record year for earnings, Goldman paid out 35.8 percent of revenue to employees. But for the last five years the figure has averaged closer to 42 percent.
The bank continued to cut staff during the fourth quarter, with 200 fewer workers. In 2012 it reduced its workforce by 3 percent, which led to an increase in pay per employee. On average, Goldman employees earned $399,506 apiece in 2012, up from $367,057 in 2011.
Setting aside less money for pay helped Goldman post a return on equity of 16.5 percent for the fourth quarter on an annualized basis, the highest level in almost three years. The figure is closely watched by shareholders because it measures how much profit Goldman can wring from its balance sheet.
(Reporting By Lauren Tara LaCapra; Editing by Gerald E. McCormick, Chizu Nomiyama and John Wallace)