Wall Street firms are catching up on employee compensation and raising wages in the second year of a deal-making and trading boom.
Goldman Sachs CEO David Solomon said so on Tuesday during a conference call with analysts to discuss the bank’s fourth-quarter results. At one point during trading, shares of the bank were down more than 8% after a surge in quarterly spending surprised investors.
Analysts peppered Solomon and new CFO Denis Coleman with questions about the increased spending and their expectations for the future. The rise in compensation costs announced on Wall Street for 2021 may have surprised analysts as banks showed restraint on compensation in the previous year, the first of the pandemic.
“There’s real wage inflation everywhere in the economy,” Solomon said when asked by Deutsche Bank analyst Matt O’Connor if the recent pay increases were “catch-up increases.”
“There were definitely places where I’m thinking with hindsight and with the ever-evolving environment of Covid and changes in the supply chain, the monetary and fiscal environment, what they’ve been doing with savings rates, etc., there was real” pressure on wages, Solomon said.
Compensation costs at Goldman rose 33% to $17.7 billion for 2021, a whopping $4.4 billion increase fueled mostly by pay increases for good performance, executives said. As a result, average compensation per employee reached approximately $404,000 in 2021, up from $329,000 in 2020.
Goldman’s pay rise broadly followed the rise in noninterest revenue year over year, jumping 33% to $52.9 billion, driven by a massive 55% increase in investment banking revenue. In 2020, the story was different, with revenue up 24% and compensation just 8%.
Average employee salary figures skew reality at Goldman, where top producers receive multimillion-dollar packages while most employees earn significantly less. According to the bank, new hires are more likely to be made in lower-cost regions. About 90% of the new hires during the year are based outside of the financial capitals of New York, London and Hong Kong, the bank said.
JPMorgan Chase and Citigroup executives have made similar disclosures, saying they have been forced to pay up to retain valued employees. With inflation hitting almost every type of goods and services this year, it makes sense that it would eventually reach Wall Street workers.
On Tuesday, Goldman’s CFO echoed those comments, saying that the company is “committed to rewarding top talent in a competitive work environment.”
Management has the flexibility to quickly pivot and allocate less capital to trading and lending should market conditions warrant, Goldman executives said.
“We’re not in the quarterfinals yet,” said Solomon. “We are focused on our one-, two- and three-year vision for how we can continue to move the business forward.”
Goldman employees will be notified of their 2021 pay packages starting this Wednesday, according to people who know the schedule.