Goldman Sachs (NYSE:GS) retains its position as the highest paying investment bank by setting aside more cash as compensation per employee over the first half of the year than any of its competitors.  Interestingly, the investment bank which ranks second in terms of average employee compensation is not one of the big-wigs like Morgan Stanley (NYSE:MS) or JPMorgan (NYSE:JPM) or the substantially smaller Jefferies (NYSE:JEF). And considering the fact that all the big banks are in a cost-cutting mode, Jefferies may very well end up at the top of the list soon with its focus on aggressive expansion.
We maintain a $122 price estimate for Goldman’s stock, which is about 20% higher that the current market price. We attribute this difference to the significant pessimism among investors toward investment bank stocks given the deteriorating economic condition in several European nations and a sizable exposure that these investment banks have to these economies.
In its earnings release for this quarter, Goldman revealed that its total compensation pool for the first half of 2012 was almost $7.3 billion.  This works out to an average payout of just under $226,000 for its 32,300 employees – a tidy sum especially given the weak economic conditions around the globe which have also hit Goldman’s earnings for the period (see Goldman’s Income Sinks But Stock Still Has 20% Upside)
We capture Goldman’s compensation expenses in our analysis of the investment bank as part of the pre-tax earnings margin which we calculate and forecast for each of its operating divisions. This margin for its money-minting debt trading business is shown in the chart above.
In comparison, JPMorgan reported compensation expenses of $4.9 billion for the six month period – indicative of an almost $185,000 average pay package for its 26,553 strong investment banking workforce. This is a good 18% below what Goldman offered its employees.
Talking of investment banks’ compensations, Jefferies has a rather unexpected presence among its much bigger competitors. Jefferies reported compensation expenses of $870 million for 1H 2012, with a full-time workforce of 3,809 employees. Considering that both Goldman and JPMorgan report headcounts including part-time employees and consultants, Jefferies equivalent headcount would be 10-15% higher. This would mean the smaller investment bank paid its employees anything between $200,000 and $210,000 as average salary.
Here it must be noted that Goldman and JPMorgan are both looking to cut costs in view of weak revenue generation prospects presented by the macro-economic conditions in the near future. Goldman has already trimmed 1,000 jobs since the beginning of the year, and this trend is expected to continue for the rest of the year. While the cuts would help Goldman reassign costs to retain talent, there is no denying that Jefferies has been able to attract employees from all the big banks since 2008 by offering higher priced, multi-year contracts. If this continues, Goldman may find itself ousted from its perch as the highest paying global investment bank.Notes:
- Jefferies Vies With Goldman for Highest Wall Street Pay, Bloomberg Businessweek, Jul 26 2012 [↩]
- Goldman Sachs Reports Second Quarter Earnings, Goldman Sachs Press Releases, Jul 17 2012 [↩]