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Please, Sir, I Want Some More.

How Goldman Sachs is carving up its $11 billion money pie.


It’s like buying a gift for the guy who has everything: What can you do to impress the boss for whom you’ve already been pulling all-nighters and all-weekenders? That’s the dilemma faced by thousands of investment bankers in New York every fall, when bonus season gets under way. Starting sometime after Labor Day and ending before Christmas, everybody in the financial industry is on their best, most obsequious behavior, hoping to curry the favor of those who divvy up the spoils. And what spoils there are this year—the 2005 bonus season looks to be Wall Street’s biggest haul in five years. Last year, the New York State Comptroller’s office estimated the average bonus on Wall Street to be a clean $100,600 (or $15.9 billion split among 158,000 employees). Early estimates of the 2005 bonus pool reach as high as $19 billion.

Typically, Goldman Sachs’s announcement of its third-quarter results kicks the bonus season into high gear. Long revered for being where the serious money gets made, the firm has had a blowout year even by its own standards. Announcing a record profit in the third quarter, Goldman also noted that it had set aside $9.25 billion, almost $420,000 per employee, in compensation. When fourth-quarter results are factored in, that total could swell to an $11 billion pool, or $500,000 per employee.

Naturally, money on Wall Street is not shared equally, not even close. Most Goldman employees will receive a good deal less than half a mil, while a few will make an ungodly amount more. It’s simply a matter of how much more. Is that guy on the commodities desk who bet right every time on the price of oil worth $20 million this year—or $25 million? Maybe it’s worth taking $5 million out of the pocket of that old-school investment banker who couldn’t close that simple snack-food takeover deal. Maybe it’s time he was sent a clear signal about the weight he’s been failing to pull.

Even in the land of seven-figure incomes—in fact, especially in the land of seven-figure incomes—bonus sensitivity runs high. “Most days, I think I’m one of the most overpaid people on earth,” a former Goldman employee told me. “But other days, I feel like I’m getting shafted. Everyone at Goldman is afraid of feeling that way.” The result of extensive interviews with both current and former Goldman employees, what follows is our best guess at how, exactly, that shafting takes place. That, and the names of a few people you’ve never heard of who make more money than A-Rod.

The standard portion of net revenue (total revenue minus interest expense) earmarked for compensation at Wall Street firms stands at an astonishing 50 percent. That’s because talent is the most precious commodity on Wall Street; it’s what they sell, so it’s also what they have to pay for.

“Wall Street is just a compensation scheme,” says Andy Kessler, a Wall Street veteran and the author of several books about its culture. “They literally exist to pay out half their revenue as compensation. And that’s what gets them into trouble every so often—it’s just a game of generating revenue, because the players know they will get half of it back.” Goldman Sachs is no exception to this lucrative rule. Through the first nine months of the year, the $9.25 billion that the company set aside for salaries and bonuses was precisely 50 percent of its net revenue.

Back in the late nineties, when Goldman Sachs’s partners were considering taking the company public, the resulting turmoil in their ranks led to the departure of Jon Corzine and the ascension of Henry Paulson Jr. to the position of sole chairman and CEO of the company. One of the primary questions Paulson faced was how Goldman could motivate its relatively underpaid junior staff if it couldn’t hold out the brass ring of Wall Street’s most coveted partnership as incentive. If the company was public, the partners couldn’t just split the profits among themselves as they always had. There would be other shareholders to think of.

As it turned out, however, not much actually changed when the company did go public. The partners still control the flow of money, and they still divert a disproportionate share of it to themselves. Although it’s no longer a partnership per se, the firm breaks down its executives into senior managing directors “PMDs” (for partner managing directors) and its junior ones “EMDs” (for executive managing directors) or “MD Lite.” Starting with the 50 percent of net revenue, the PMDs slice off a big chunk—a current EMD estimated it to be 15 percent of the total. If 2005 compensation comes in at $11 billion, as one analyst estimates, that’s $1.65 billion for the firm’s 250 or so PMDs to split among themselves. Each PMD has what are known as “points” in the partnership pool, and a quarter to a third of that 15 percent (stay with me here) is split according to those proportions. With all senior managers of Goldman taking home a $600,000 salary, an equal split of 30 percent of $1.65 billion would be worth almost $2 million, pushing their pay into the neighborhood of $2.6 million. But wait, there’s more.

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