It’s looking a lot like a difficult bonus year at Goldman Sachs. And this probably means things are equally complicated everywhere else. Salespeople and traders are expecting to get paid after generating near-record revenues, but money has to be spared to subsidize the disaster that has been ECM/DCM and M&A in 2022. Employees need to make pay sacrifices.
At this point in the cycle, therefore, any sensible CEO of an investment bank needs to ensure that expectations are managed down. David Solomon, CEO of Goldman Sachs, has been doing that at a conference today.
Speaking at the Goldman Sachs U.S. Financial Services Conference, Solomon declared that it’s an uncertain time, that markets clients are reducing risk and that the rebound in “capital markets activity hasn’t happened yet.”
This is not the moment to be paying big bonuses, then. Markets revenues stand to be impacted by reduced risk appetite and if capital markets activity doesn’t rebound as planned, the investment banking division will look increasingly overstaffed. If you’re in IBD, this may be a year when your bonus is your job.
Following last week’s revelation that the markets bonus pool at Goldman Sachs could be down as much as 30% because bonuses are being diverted to pay poorly performing GS investment bankers, traders at the bank say they’re still waiting for an update to the effect that there’s been a change of heart. “The feedback I’ve had is that a 30% cut is unworkable in markets unless they hand us a lot of zeros,” says one senior GS trader in New York. Handing out mostly zeroes to investment bankers looks like the best alternative.
Solomon’s comments today imply that Goldman Sachs could cut more investment banking division (IBD) jobs in early 2023, when other banks are expected to do the same. The firm cut around 2% of staff in September, but has held off making more cuts in the expectation that deals will rebound. Speaking at the time of the firm’s Q3 results in late October, Solomon said valuations were being reset and that people were adjusting to the new environment. While 2023 could be ‘bumpy’ and “cautious”, “capital markets generally don’t stay close no matter what the environment,” he added. The implication of today’s comments is that capital markets are still closed and that adjustments are still occurring.
Goldman Sachs’ investment bankers may want to adjust their own pay expectations accordingly. Salespeople and traders may want to do the same. It’s a painful process. “The angst here is palpable,” says the senior trader. “If we get a 30% cut to the bonus pool this year it will be the last straw for a lot of people. But we say that every year,” he adds.
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