Why Goldman Sachs needs to cut MDs (and partners)
If the Financial Times is right, Goldman Sachs' newly impending 250 job cuts will impact the firm's managing directors (MDs) more than anyone else.
There are likely to be several reasons for this. As we pointed out this morning, each MD is likely to cost the firm at least $1.5m. In a market where deals remain thin on the ground and M&A and debt underwriting revenues were down 27% and 32% year-on-year respectively in the first quarter, removing them is the obvious way to save money fast.
Goldman declined to comment on the validity of the FT's claims, but insiders at the firm say there's another reason managing directors need to be culled. Both they and partners at the firm tend to pile up due to a rule relating to restricted stock vesting that was introduced in 2008.
Known internally as the "rule of 60," this states that Goldman employees can walk away from the firm when their age plus their tenure add up to 60, and can keep all their unvested stock in the process. "Senior people have a lot of money tied up in GS unvested equity, which they forfeit if they quit for a competitor. But when they hit the 60-rule, it all vests, and they can walk away keeping it all," says one senior Goldman insider.
While this is a good thing for all those who hit the number, it also means that Goldman employees approaching the target tend to stick around for longer than might otherwise be the case. "People close to their 60-number become like roadblocks," claims the insider, speaking off the record. "They don't have the fight in them to drive real innovation because they don't plan to see it through."
Goldman isn't the only bank with the arrangement. When it introduced the 60 rule, increasing it from the 'rule of 55' previously, it said it was simply following standard practice.
Goldman's partners are also impacted by the rule of 60. Business Insider reported yesterday that 85 partners have left since David Solomon became CEO, although Solomon himself said at Goldman's recent investor day that partner turnover is no higher than usual.
Goldman has spent the past few years hiring new managing directors externally, particularly for its technology division. It's also due to promote a new class of managing directors at the end of this year.
The Goldman insider said the next round of cuts in September will simply be standard annual thinning. "There was one in Sept 2022 and this next Sept 2023 cut is to just remove the low-performing MDs and others ahead of the next MD promotion cycle at the end of the year."
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