NEW YORK (Reuters Breakingviews) - David Solomon steps into his new role at Goldman Sachs at a flattering moment. The Wall Street group reported a 21 percent increase in earnings for the third quarter of 2018. The investment bank that Solomon used to run put in a strong performance. And the firm’s annualized return on equity of 13.1 percent beat uptown rival Morgan Stanley. Big numbers aren’t really Solomon’s challenge, though – people are.
Goldman’s workforce of 39,800 is big and growing. The bank is larger than it has been in a decade and employs 11 percent more people than this time last year. They get paid pretty handsomely – an average of around $376,000 per year each at the current run rate. But it’s what they bring in that matters. Revenue of just under $1 million per person is around 40 percent higher than the equivalent figure at Morgan Stanley. After stripping out compensation, the average Goldmanite leaves roughly $615,000 on the table for shareholders.
The problem is, that number hasn’t really gone anywhere. Goldman makes as much after compensation as it did in 2012, the year when James Gorman added the title of chairman to his CEO role. Since then, Gorman’s crew has become more and more productive. What each employee brings in after they have been paid has more than doubled, to over $400,000 based on numbers reported on Tuesday.
Morgan Stanley’s business model is different – it gets around half of its revenue from wealth and investment management. Moreover, tracking how much Goldman staff bring in is going to get harder, assuming Solomon forges ahead with plans to expand into consumer offerings like online bank Marcus.
Solomon, who has a strong track record managing Goldman’s investment bankers, seems alert to the question. Executives are talking about bringing existing clients “the whole of Goldman” – a fancy way of saying staff need to bring in more bacon. That’s not a bad goal. Had Goldman got 10 percent more from the employees it had at the end of last year, all other things like tax rates and compensation ratios being equal, its earnings would have been one-fifth higher. Time to sweat that human capital.
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