Goldman’s Overrated Partner Day

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Photo: Patrick McMullan and Corbis

Today is a day many Wall Streeters have stayed up nights dreaming about since they were 12, wearing pinstripe pajamas while they read Barron's under the covers: Goldman Sachs partner day, the biennial rite in which Lloyd Blankfein and Gary Cohn tap new initiates into finance's most notorious and sought-after high priesthood.

The partnership process at Goldman has long been the subject of breathless speculation. The financial press has called it "coveted," "exclusive," and "one of the most prestigious and lucrative cliques on Wall Street." And much has been made about the legendarily tough vetting technique known as "cross-ruffing," which sounds like an interrogation tactic but is actually a reference to the brutal game of contract bridge. The 70 new partners who were named today are no doubt beside themselves with joy. Those who didn't make the cut, though, should take solace in this: Being Goldman partner is, in most important ways, highly overrated.

For starters, Goldman's "partners" are no longer partners, in any legal sense. For many years its partners actually co-owned the business and voted on major decisions. The firm's capital was, in a non-metaphorical way, their capital. But in 1999, Goldman went public, and as a public corporation, control was transferred to shareholders, a board of directors, and a management committee composed of top brass. Goldman's former partners were given the new official title of "Participating Managing Director," even though most people at the firm still use the holdover "partner" term because it sounds fancier.

So, what does being a Participating Managing Director get you?

First, more money. According to Goldman's 10-K filings, PMDs are made part of a "Partner Compensation Plan" that entitles them to a stake in a bonus pool set aside specifically for them. In addition, The Wall Street Journal reports that the base salary for PMDs is bumped up to $900,000 a year, with bonuses paid mostly in the form of Goldman stock. In 2011, the Times reported that Goldman's PMDs controlled 11 percent of the company's stock, and had cashed out more than $20 billion worth of shares since the 1999 initial public offering.

But that raise comes with caveats. According to the 10-K, PMDs at Goldman are also required to hang on to at least 25 percent of their Goldman shares at any given point. The purpose of this requirement is no doubt to align the partners' incentives with the firm's as a whole, but the effect is that most PMDs wind up having a larger chunk of their net worth tied up in the firm's stock than lower-ranked employees. That's good if the stock is doing well, but bad if, say, you made PMD in 2006, three cycles ago, and have seen the value of your Goldman stock fall by nearly 40 percent. In 2010, the Times wrote: "When the firm does not do well, partners tend to bear the brunt of it."

In addition, as a PMD, your compensation is also subject to being toyed with in times of financial or reputational trouble. In 2010, for example, when Goldman was being pilloried in the press for its role in the financial crisis, it disclosed that its "2010 compensation for participating managing directors (“partners”) ... was reduced by $320 million to make a charitable contribution to GS Gives," the firm's charity arm. For PMDs, that one-time donation meant a big hit to your year-end bonus, all for the sake of improving the firm's public image.

Many of the other perks of making PMD are more minor than they might seem. For example, while it may be true that being a Goldman partner "opens the door to high-profile career moves," those doors exist for employees who don't make partner as well. Here, according to Here in the City, is the reception one Goldmanite got from a rival firm after failing to make partner at Goldman:

Within 3 months, and despite the best efforts of the firm, I succumbed to the enticements of a random headhunter. I collected my bonus and, with a heavy heart, moved to a rival firm. My salary was significantly increased, and I was given a two-year guaranteed bonus deal. My new employer cared nothing that I hadn't made partner first time round at Goldman. The fact that I was partner material was enough for them.

Then, there are the various reported ancillary perks of making partner at Goldman, as described by the Journal in 2006:

Goldman's partners also are offered opportunities to invest beside the firm when it buys stakes in other companies, which can be lucrative. Such offers aren't typically available to other Goldman executives. They can buy Goldman shares at a 25% discount. The firm prepares their taxes. Goldman will even book tables for them at hot New York restaurants such as Babbo and Spice Market.

A source at Goldman told me that some of those perks "are more myth than fact." But let's say all of them are real. Is getting your taxes done for you, a savings of maybe several thousand dollars, a huge boon to your personal happiness? (Especially considering that, by the time you're in line to become a Goldman partner, you've likely been paying someone to do your taxes for several decades?) Does getting a corner table at Babbo really make up for years of lost sleep and sharp-elbow politicking?

There are, of course, internal benefits to being named a partner. You get a window-facing office, and you become an emissary for the firm's culture and reputation. You also get worshiped by junior analysts and associates, who generally view PMDs as golden gods. But you also get dozens of new time-consuming responsibilities. You are put on more committees. You get enlisted to give pep talks to interns. You are volunteered for various firm-sponsored initiatives.

The stress of added responsibilities was once mitigated by the fact that Goldman partners basically had bulletproof job security. Few were ever fired, and most remained at the firm well past retirement age. But now, there is "de-partnering," a Goldman practice whereby a portion of the existing partners are quietly stripped of their status each cycle, in order to keep partners from getting complacent and to open the ranks for more incoming members.

In other words, while being made a Goldman partner once was the Wall Street equivalent of getting tenure at Harvard, it now amounts to a raise and a promotion, with a bunch of new meetings and responsibilities tacked on.

Which is not to say that Goldman is dumb to keep the partnership system around. Rightly or wrongly, being a PMD at Goldman is seen as the most prestigious job title in finance. It's an exclusive club reserved for the best of the best. And that exclusivity has a huge impact on younger employees, who see the hope of that 8:30 a.m. phone call from Lloyd or Gary as reason to keep their noses to the grindstone for decades. (As analyst Glenn Schorr told the Journal six years ago, the Goldman partnership system is the "best corporate motivation tool I have ever seen.")

But let's not confuse it for anything more than a bit of cash, a symbolic gesture, and a very effective management tool that is used to motivate junior executives. So let the newly named partners at 200 West Street this morning pop their Champagne and celebrate their ascendance to the top of the Wall Street ladder. And let the hundreds of Goldmanites who didn't make this year's cut rest easy, because in many ways, being a partner at Goldman ain't what it used to be.