Goldman Keeping Lid on Pay Amid Rebound Cheers Investors

Goldman Sachs Group Inc., the securities firm that set a Wall Street compensation record in 2007, is now demonstrating how little it can pay.

The portion of revenue allotted for salaries, bonuses, stock awards and benefits was 38 percent in 2012, down from 42 percent a year earlier and the lowest since 2009, the company said yesterday in a statement. The move helped the bank post a fourth-quarter profit that beat analysts’ estimates and pushed return on equity to 10.7 percent for the year, up from 3.7 percent in 2011. The stock climbed the most in 10 months.

“It’s a better time to be an investor than when bonuses are becoming ridiculous,” said Michael Vogelzang, chief investment officer at Boston Advisors LLC, which manages $2.4 billion including Goldman Sachs shares. “You’re seeing a massive amount of overcapacity in the business and it’s continuing to push down the price of labor.”

Goldman Sachs still may be one of few Wall Street firms that pay employees more for 2012 because revenue surged 19 percent and it cut staff by 3 percent. JPMorgan Chase & Co., the biggest U.S. bank by assets, cut total compensation expense at its corporate and investment bank 3 percent last year as revenue at that division rose 1 percent. The pay expense was 33 percent of revenue for the year, down from 34 percent in 2011.

‘Operating Leverage’

Morgan Stanley, which is eliminating 1,600 jobs, will defer 100 percent of bonuses for some senior bankers and traders over three years as it reins in costs, a person briefed on the matter said earlier this week. Deutsche Bank AG is weighing 2012 bonus cuts of as much as 20 percent for investment bankers in Europe, while those in New York will see smaller declines, four people briefed on the matter said this week.

Anton Schutz, president of Rochester, New York-based Mendon Capital Advisors, said control of expenses, which rose 1 percent during 2012 even as revenue climbed 19 percent, is something Goldman Sachs investors have craved.

“One of the things we’ve been looking for in this space for a long time is operating leverage,” said Schutz, whose firm has about $150 million under management including Goldman Sachs stock. “That’s exciting for shareholders. I don’t think it’s so good for employees unless they own a lot of stock.”

Goldman Sachs rose 1.7 percent to $143.50 by 10:52 a.m. in German trading after climbing 4.1 percent yesterday in New York to $141.09, the biggest advance since March. The shares have gained 11 percent this year on top of a 41 percent advance in 2011.

Market Rebound

The bank derived about 70 percent of its revenue last year from investments with the firm’s own money or trading with clients. The performance of those businesses is often tied to the rise or fall of asset prices.

A stock-market rebound and a $500 million profit from selling a hedge-fund-administration unit helped revenue recover from the lowest first half since 2005 as the company booked its first annual revenue gain in three years. Revenue in Investing & Lending, the segment that includes the firm’s stakes in stocks, bonds, real estate, private equity and hedge funds, almost tripled last year to $5.89 billion from $2.14 billion.

Ed Najarian, an analyst at International Strategy & Investment Group LLC, said he raised his estimates for Goldman Sachs’s earnings per share through 2015 because he expects the annual compensation ratio to hold below 40 percent. He kept a neutral rating on the stock because he expects gains from private-equity and debt holdings to be lower this year and predicts regulations will limit trading revenue, according to a research note yesterday.

Reinsurance Business

Goldman Sachs said yesterday that $1.08 billion of the firm’s $8.2 billion of equity trading revenue was from the bank’s reinsurance business, marking the first time that the company disclosed revenue from that segment. The firm is considering selling a majority stake in that unit, said Harvey M. Schwartz, who will replace Chief Financial Officer David A. Viniar, 57, at the end of this month.

The bank still doesn’t have enough information on proposed regulatory changes to give a target for future return on equity, Schwartz, 48, said on a conference call with investors. The 10.7 percent figure for 2012 was “not particularly aspirational,” he said. “We’d like to do better.”

Central bank policies have boosted asset prices, and that’s likely to continue to contribute to higher profits at firms like Goldman Sachs, said Boston Advisors’ Vogelzang. He said he expects the bank’s return on equity to reach the “mid-teens.”

“The way we view the ROE target is this is a very cyclical business, highly dependent on capital markets,” Vogelzang said. “Our outlook for particularly the U.S. equity markets is quite strong, and they’re going to be levered to that.”

Better Balance

Chief Executive Officer Lloyd C. Blankfein, 58, has undertaken a $1.9 billion expense-reduction effort since mid-2011. That helped reduce the compensation ratio, which was part of an effort to strike a better balance between rewarding employees and shareholders, Schwartz told analysts.

“This year we hope we got the balance right,” he said.

The bank employed 32,400 people as of Dec. 31, 900 fewer than the end of 2011. It allocated $12.9 billion for compensation, up from $12.2 billion in 2011. That averages $399,506 per employee. While that’s up from $367,057 in 2011, it’s 40 percent less than the $661,490 average for 2007.

That’s a reflection of how much the market has changed, Vogelzang said.

“It’s a very interesting case study in the supply-demand equation for high wage-earning, white-collar workers,” he said. “We’ve certainly seen it in manufacturing, we’ve seen it in lower-level services, but we’re now seeing it at places like Goldman and Morgan Stanley.”

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