Five questions for Goldman Sachs on bonus day
Today is the day that Goldman Sachs announces its bonuses for 2020. If it gets them right, people will stay in situ throughout 2021. If it gets them wrong, there will be exits to rival banks and hedge funds.
Most people at Goldman have yet to discover their numbers. While they wait for the good/bad news, these are the issues that Goldman's bonuses need to address. They apply to most banks, although some apply to GS more than others.
1. Should M&A bonuses be cut?
As at rivals, M&A revenues at Goldman Sachs declined last year. - Goldman's M&A revenues were down 4% in 2020 versus 2019. In the words of CEO David Solomon, all dealmaking activity hit a "real kind of doldrums as the pandemic hit."
However, as clients became 'accustomed' to the pandemic and the SPAC boom took off, dealmaking recovered. Goldman ended the year at the top of the global league tables for completed M&A, and Solomon said he's "cautiously optimistic" on the investment banking outlook, "given the robust activity levels in the capital markets and the elevated strategic activity on the back of improving confidence."
Does this mean M&A bankers need retention bonuses? Or can Goldman scrimp on their pay in order to reward its equity capital markets (ECM) bankers instead. After all, their revenues rose 130% on last year's SPAC boom, that probably won't be repeated.
2. Should seniors sacrifice big bonus increases for the sake of juniors?
This too is an industry-wide issue. - To what extent does last year's windfall go to senior vice presidents and above?
As we noted last year, 31% of FINRA-registered people at Goldman Sachs on Wall Street have less than two years' experience. Another 31% have more than 10 years' experience. How these two cohorts are paid will shape the bonus pool.
If Goldman Sachs is like Deutsche Bank, it will make a big deal out of squeezing senior staff (at MD level, not heads of business) and paying juniors. If Goldman Sachs is like French banks, it will direct pay rises towards senior staff and top performers. "Our philosophy remains to pay for performance, and we are committed to compensating top talent," said CFO Stephen Scherr this week. This might suggest that bonuses will be heavily skewed towards top performers at all levels, but juniors sitting at home alone during the pandemic might need some additional love right now.
3. How much is needed to stop the exits to Citadel?
As we've reported, hedge fund Citadel has a habit of hiring traders, quants and technologists from Goldman Sachs. It also has a reputation for paying large amounts of money to attract people. This is unlikely to stop anytime soon. - Pablo Salame, the former co- head of Goldman's markets business and David Casner, the former head of Goldman's flow equity derivatives trading business both joined Citadel in the past 18 months and are both busy plucking junior and senior staff from Goldman. Can higher bonuses stop the outflows? If so, how much higher?
4. How much do technology staff need?
There were concerns at JPMorgan that technology staff would be paid down in this year's bonus round, but early indications are that this doesn't seem to have been the case. The pressure is therefore on at Goldman Sachs to ensure that technology bonuses are strong, particularly given competition for talent from the likes of Facebook in New York. However, while Goldman is investing more in technology platforms and systems, it's also looking to "harvest cost savings" to pay for those tech investments, and is shunting technology roles to lower cost locations like Bangalore. Is it really necessary, therefore, to give bigger bonuses to technologists in London and New York?
5. Can bonuses for European staff be adjusted to local norms?
Post-Brexit, Goldman now has more staff in Frankfurt, Paris, Milan and Madrid than previously. However, we know from reports from the European Banking Authority that pay in those cities has historically been substantially lower than in London. - For example, only 100 people working in German finance earned more than €1m in 2018, versus 1,433 in the U.K.
Is Brexit an opportunity to cut compensation spending in Europe? - Or does this mean pay in European financial cities will be rebased to the U.K. levels?
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