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The Globe and Mail

Goldman shareholders left in the backseat

A Goldman Sachs shares briefly traded at a bigger discount to book value than rival JP Morgan Chase and Co.

BRENDAN MCDERMID/REUTERS/BRENDAN MCDERMID/REUTERS

Bankers at Goldman Sachs rank ahead of its shareholders again. The firm is paying less in 2011 for compensation and benefits than it did the previous year. But the chop falls short of the decline in most other metrics investors use to judge investment banks. Deeper compensation cuts would show some respect for its public shareholders while keeping Goldman from wearing a dubious league-table crown.

While pay tumbled 21 per cent, revenue fell by 26 per cent and earnings applicable to shareholders 67 per cent. Goldman stock, meanwhile, tanked by more than 75 per cent over the course of the year. Compensation needn't come down in line with the worst number a firm produces, but even after trimming its fourth-quarter staffing bill, Goldman still distributed 42 per cent of the year's revenue to employees – more than most, if not all, its U.S. rivals.

Goldman's travails produced a sad return on equity of 3.7 per cent for 2011. If it had rewarded the underwhelming efforts of its bankers and traders with the same ratio of compensation to revenue as the combination of JPMorgan's investment bank and asset management divisions did, Goldman would have boosted returns by half, or $1.2-billion. Adding back in the $1.6-billion the firm paid to redeem Warren Buffett's preferred shares would push the figure to almost 8 per cent.

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That's hardly stellar and probably still short of Goldman's cost of capital. But it wouldn't have been as bad, especially considering the tough environment. It also would have bested the return earned by JPMorgan's investment bank in 2011 and shown a willingness to put shareholders first without treating its employees any more harshly than peers. If Goldman can't perform any better than its rivals, premium wages can no longer be justified.

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