The shift implies that Goldman thinks the next few years will be a tough slog for Wall Street, without many great money-making opportunities. But beyond that, opportunity should open up again. And by thay time, Goldman will be ready with a horde of middle- to senior-level staffers recruited when the economy was slow.
On a conference call discussing the firm’s second-quarter earnings Tuesday morning, Chief Financial Officer David Viniar pointed out that on-campus hiring of college students would likely to result in Goldman having a higher headcount at the end of the year than it does now. But the overall mix would be “more junior and less senior.”
Goldman’s summer program this year reflects this emphasis on growing the junior ranks. This year, Goldman has about 2,000 summer interns worldwide—back up to the levels seen before the financial crisis. The size of the summer internship class is generally a good guide to Goldman’s ambitions for hiring junior staffers a year or two in the future.
As I explained back in June, this demographic shift at Goldman is also a financial shift. It is a form of deleveraging at the company. Senior staffers, from vice-presidents to non-partnership directors, are a form of fixed costs at the firm—operating a lot like debt instruments.
Wall Street firms describe their people as “human capital.” But in many ways, they are more like “human debt.” They enable a firm to perform better than the actual capital—the senior MDs and partners—would alone. The return on “equity”—that is, the profits going to senior executives—is greater because the MDs and VPs don’t receive as great a share of the profits. But when profits are low, they drain income from senior executives.
Reduced compensation at all levels exacerbated this problem. With senior executives receiving lower levels of compensation than they did before the crisis, there is a tendency to stay on longer. This means there are fewer opportunities for the middle ranks to move up—and thus fewer incentives for them to become profit-centers rather than cost-centers.
Another change in compensation—the move away from annual bonuses and toward higher fixed salaries—has made this problem even more acute.
It is now much harder to reduce the compensation costs of the upper-middle ranks of an investment bank based on a firm’s annual performance. Gone are the days when all a firm had to do was slash bonuses in a tough year. Salaries have become much more akin to debt service.
Finally, a third compensation switch may also be a contributor toward this trend. Firms have been compensating employees with larger levels of equity instead of cash. Many firms, however, believe that their shares are currently underpriced. Awards and options granted now will be costly if prices rise in the future. What’s more, in order to avoid diluting existing shareholders, firms may need to buy back stock when equity compensation grants vest. Paying middle-ranked executives with costly equity may simply be a price too dear for some firms.
So when firms start letting managing directors and vice-presidents go, it is a form of deleveraging. They are reducing their exposure to the high-fixed costs of middle-ranks.
Meanwhile, Goldman is out recruiting college students to fill its most junior ranks. It’s a move that shows that Goldman is still in the business of long-term "greed."
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