Goldman prepares to cut its partners down to size
Goldman Sachs chief executive David Solomon is wrapping up his first year in the job by easing out long-standing partners to free up bigger jobs and rewards for the next generation.
Not since it went public in 1999 has Goldman been a true “partnership”, but it has retained the title, which still brings perks and status that are unique on Wall Street.
Under Mr Solomon, though, senior management at Goldman has been reviewing the top of the pyramid amid worries that the club is no longer exclusive enough. Those at the top are in danger of being pushed off their perch.
“We are trying to make the partnership as special as it can possibly be,” said one person involved in reviewing it. “To make it special, it’s got to feel like it’s a high-quality group of people, all of whom everybody believes deserves to be in there, and that they add real value to the team.”
He added: “There has been some creep over time.” Goldman has about 450 partners, already down from the almost 500 partners Mr Solomon inherited when he took over as chief executive last October, but well above the 221 partners the bank had when it went public in 1999.
Reports of the partnership’s contraction have triggered alarm in some corners of the bank, with one former partner describing it as a “purge”. “Partners don’t retire,” he added. In recent days Mr Solomon has reassured colleagues that while the partnership will shrink, the reduction will not be dramatic.
“I think it’s a good thing,” said one partner, adding that Goldman had already made changes to its second tier appointments — managing director. In 2013, it made managing director promotions a biennial event rather than an annual one to prevent the status being “diluted” by too many newcomers.
The partner said Mr Solomon and Goldman president John Waldron had been “very candid” about promoting fewer people in last year’s partnership class, when just 69 people were added, the lowest number since Goldman listed.
The process of “departnering” can be brutal. Goldman always announces its new partners with plenty of fanfare but a handful each year are quietly ejected. At the same time, other partners retire or leave voluntarily to run businesses or move into government.
A clutch of prominent partners have recently left or are in talks to leave. Leavers include securities division co-head Marty Chavez and Jeff Nedelman, from the bank’s equities trading division. Technology boss Elisha Wiesel and research chief Steve Strongin are still negotiating possible exits along with a group of others.
One person familiar with the moves said some older partners had been “tapped on the shoulder” in order to clear the way for the next generation. “We’ve had a very conscious effort that we wanted to unlock the talent and start to activate the next generation,” he said. Another described the departures as “making room” for younger staff who “want to step up and … are getting the opportunity to drive the business”.
Goldman’s leadership is also mindful that a smaller partnership means fewer people to feed from the partners’ bonus pool, and fewer people to split the action in lucrative investment opportunities.
Along with salaries of about $950,000 and the potential for sizeable bonuses on top, the real financial benefit has been privileged access to investment opportunities in companies that have included Uber, life sciences firm Avantor and China’s ICBC bank. The private equity investments are available to all partners without fee.
Yet the rewards from the partnership are leaner than they used to be, said one partner. It has been a long time since Goldman had a “blowout year” for bonuses, the partner said, as its trading powerhouse suffered a sharp fall in earnings.
The bank tried to cushion the blow for younger partners by offering them preferential terms in investments. Those who have been partners for less than six years can borrow to increase their investments in Goldman’s private equity investment funds, so they effectively get $2 of exposure for every $1 they invest.
That has left them with decent rewards, but not in the same league as pre-IPO partners who shared the bank’s entire profit pool and made fortunes from its listing, or partners before the 2008 crisis who more than quadrupled their money on investments such as ICBC.
A long-running strategic review by Mr Solomon and his lieutenants is another factor driving churn at partner level. Goldman has promised to outline the review’s outcome and the bank’s plans for the future at an investor day in January.
“We’ve been getting ourselves organised now for almost a year,” the first person said. “We’re making sure we have the right people in place in the right seats to finalise the delivery of those plans.”
One of the people familiar with Goldman’s approach said that there was not a formal process of asking people to sign on for three years to see the strategic plan through, but that executives were talking to their key people about their plans for the future to work out “whether people are on the boat”.
Over the longer term, Goldman’s leaders are keen that the partnership’s make-up is more diverse and better reflects Goldman’s future as a group less focused on trading and investment banking and more focused on consumer banking, cash management and serving smaller companies.
About a quarter of the current partners work in trading, which contributes over a third of annual profits. Investment banking has traditionally had a higher concentration of partners relative to its revenue contribution, partly because partnership status can help investment bankers to win clients.
Roy Smith, a pre-IPO partner in Goldman who is now a professor at NYU Stern, said the industry had undergone huge change since Goldman’s partnership was conceived, but that Goldman remained wedded to the concept.
“Many partners get offers to do other things at hedge and private equity firms . . . that means that Goldman Sachs has to keep the partnership flame alight to continue to attract talented people.”