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Goldman Resists Pressure to Cut Banker Pay (Update 2)

Goldman Sachs earnings story updated with additional information throughout.

  • Goldman Sachs(GS - Get Report) reports second quarter earnings per share of $1.78.
  • Revenue decreased 33% from the previous quarter, to $6.63 billion.
  • Analysts were expecting EPS of $1.14 on revenues of $6.28 billion.

NEW YORK ( TheStreet) -- Goldman Sachs (GS - Get Report) made no change to its compensation practices even as earnings continued to decline, according to second quarter results released by the company on Tuesday.

Overall, Goldman earned $962 million, or $1.78 per share in the second quarter.

Revenues of $6.63 billion were 33% lower than the previous quarter and 9% below the second quarter of 2011. Earnings were 55% lower than the previous quarter and 12% lower than a year ago.

"During the second quarter, market conditions deteriorated and activity levels for both corporate and investing clients were lower given continued instability in Europe and concerns about global growth," said Lloyd C. Blankfein, Chairman and Chief Executive Officer.

As a group, analysts were looking for Goldman to earn $1.14 per share on revenues of $6.28 billion.

Earnings at Goldman and across Wall Street have been plunging as financial institutions deemed too big to fail have been forced by regulators to cut back on risk taking. At the same time, and only partly as a consequence of the new regulatory environment, investing and lending activity remains well below the levels seen prior to the 2008 crisis.

Executives at Goldman and other firms insist earnings will rebound, and so they have resisted tinkering with a longtime formula of allocating just under 50% of revenues to compensation and benefits. Shareholders have shown signs of impatience, however, arguing that reducing pay is the only reliable way to improve earnings. Earlier this year, for example, in a non-binding vote, Citigroup (C) shareholders voted against the roughly $15 million pay package of CEO Vikram Pandit.

At a May 31 investor conference, Sanford Bernstein analyst Brad Hintz asked Goldman president Gary Cohn why the company doesn't "just reduce compensation and increase dividends." Cohn said he feared losing talented executives to competitors.

"There is enormous pressure out there, even in a market environment like this, for the best people. It's not like we are not having turnover; it's not like we are not losing people," Cohn said.

Goldman allocated $2.92 billion for compensation and benefits in the second quarter, 9% less than a year ago.

The ratio of compensation and benefits to net revenues for the first half of 2012 held steady at 44.0%, in line with the forecast of Sanford Bernstein analyst Hintz.

In 2011, Goldman saw revenues fall by 26% and it slashed compensation and benefits by 21% as a result. Discretionary compensation, meanwhile, fell, "significantly more than revenues," according to Cohn's comments May 31.

Cohn said Goldman has been cutting compensation in part by focusing on relatively lower cost locations such as Bangalore, Singapore and Salt Lake City. These "high value locations," as Cohn called them, now account for 17% of the company's total headcount.

Also on Tuesday, The Wall Street Journal reported Goldman is building a bank to lend money to wealthy individuals and companies. Goldman is hoping to lend as much as $100 billion.

Goldman also sold a provider of hedge fund administrative services, Goldman Sachs Administration Services (GSAS) to State Street Corp. (STT - Get Report).

-- Written by Dan Freed in New York.

Follow this writer on Twitter.
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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