It’s one of the most exclusive and coveted clubs in banking, and admission is getting even harder.
The Wall Street Journal reports that Goldman Sachs is going to promote fewer of its top executives to the vaunted ranks of partnership (paywall). Goldman partners represent the investment banks creme de la creme. The firm selects partners every two years, in a months-long vetting process usually culminating with public announcements in late October or November. A new class will be named later this year.
It can be a life altering event for the elite few who get the nod. Not just because of the prestige but also because of the lucrative rewards afforded to them: partners represent a meager 1% of the bank’s 34,500 staffers but earn a chance to split billions in the firm’s profits among them.
However, the halcyon days in Wall Street are fading. Trading is woeful. Profits at Goldman, in common with the rest of the banking world, haven’t been spectacular since the 2008 financial crisis, which resulted in toughened financial regulations.
What’s a powerhouse bank to do? Goldman’s options are limited as it tries to manage the cost of doing business in this new regulatory era. It has already shrunk staff, used technology to cut costs and shifted a greater portion of its workers to areas like Salt Lake City, Utah and Dallas. It’s encouraged senior partners to leave in an effort to make way for young blood. The bank also decreased the frequency at which it promotes its managing directors, those rising stars who would be in contention for partnership status.
Goldman hopes that decreasing the number of partners to 70, from as high as 110 as recently as four years ago, will naturally cull the herd, leaving behind only those staffers who help the firm ring up the highest profits.
The bank can argue that these cost-cutting tactics have been successful in ringing up better returns than rivals. For example, Goldman’s return on equity—a measure of performance—of about 11 % for the first half of 2014, has been outpacing many of its rivals (rival Morgan Stanley’s ROE is about 7%). But in the end, taking aim at its heralded partnership culture suggest that Goldman may have few levers left to pull, as veteran Sanford Bernstein bank analyst Brad Hintz warns in a June note:
However, with most of the cost cutting and outsourcing behind them, we are not convinced there is much opportunity to cut costs further. And with the relentless stream of new regulatory compliance requirements facing the banks, we worry there will be upward pressure on compliance-related expense going forward.