On Monday, anonymous sources at Forbes and Reuters reported that Goldman Sachs Group Inc. (GS) has finally capped the compensation of its 100 partners in the UK at £1 million ($1.6 million) each. The ceiling on total compensation comprises all salaries and bonuses.
 
The decision of restricted compensation for its 5,500 UK staffers was taken by Goldman following the announcement of the Britain’s 50% tax on bonuses exceeding £25,000 ($40,810), in Dec 2009. Hence, Goldman countered the situation by capping its compensation at about 36% of net revenues in 2009, compared to 49% in 2008, also paying employees more stock with longer vesting period and less cash, while completely nixing cash bonuses for its top 30 executives. This is the sharpest cut in compensation since the company went public in 1999. Goldman and other foreign banks have been in negotiations with the UK authorities and are also mulling other alternatives to avoid the UK bonus tax in future.
 
Last week, Goldman reported earnings of $8.20 per share, significantly ahead of the Zacks Consensus Estimate of $5.18. Despite the global financial crisis and the total repayment of the government bailout fund, Goldman managed to pay out $16 billion in annual employee compensation in 2009. However, this was lower than the record $20.2 billion payment in 2007.
 
Moreover, the ongoing negotiations to regulate the use of banks’ earnings in the US have further weighed heavily on the banking operations. This also followed compensation cuts at Goldman and its peers such as Morgan Stanley (MS) and JPMorgan Chase & Co. (JPM) during the fourth quarter. However, a global agreement on a common regulatory approach toward compensation issues should be worked upon that can prove beneficial for companies, its employees and the government.
 
Goldman has performed better than market expectations and survived the financial crisis. The company benefited from its low exposure to toxic mortgage-backed securities and increased client activity. Although current litigation issues on consumer lending and higher bonus payments continue to bother Goldman, we believe the company is poised to grow significantly with its well-diversified business model and a more conducive operating environment.
Read the full analyst report on “GS”
Read the full analyst report on “MS”
Read the full analyst report on “JPM”
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