Why Goldman Can't Afford to Cut Paychecks

For some, the recovery is happening a lot sooner than for others.

Financial services firm Goldman Sachs recently disclosed that it paid its employees a total of $4.34 billion in compensation in the first three months of 2013. With 32,000 employees, that works out to an average of $135,594 per employee. Imaginably, this number is skewed towards the top, with several earning over $10 million annually. But perhaps that’s counteracted by “the secretaries, clerks, and other support staff who make far less,” as Bloomberg Businessweek notes. A lot of money is being thrown around; it is so much that even Goldman Sachs is trying to reduce the sum.          

But supply and demand for financial services works exactly the way supply and demand for any product or service works. So if the market is currently paying financial sector such large sums, the market — the firms — must consider it worthwhile to pay such fsums. Supply and demand doesn't lie, unless supply/demand itself is being manipulated. And it’s not.

Goldman cannot afford to cut pay — otherwise it would almost certainly lose its employees to other firms — so instead it is focusing on trimming the headcount. It hired around 400 fewer people in those three months than it did over the same period last year, which allowed the company to cut compensation costs by about 1% Over the past five years, Goldman has managed to trim compensation costs by more than a third, while revenue fell 26%, Bloomberg writes.

But even that is of limited use — 1%, even if it is in the billions, is will always be an inconsequential sum — so firms have turned to trying to cut non-compensation costs. Also firms have tried to tie their employee’s fortunes to the state of the company — like rewarding employees with more stock options and other kinds of long-term compensation. Some people argue that such a move discourages outsize risk-taking and ties an employee’s interest to the long-term health of the bank; and thus their continued remainder there.

The question of whether these people “deserve” such pay is one of principle and of philosophy, but the one of whether the financial gain from such pay to the state — and thus the population at large — outweighs any such inequalities. In New York City alone, financial sector accounted for nearly a quarter of all private sector wages paid in the city last year, even though they accounted for just a fraction, 5.3%, of the city’s private sector jobs.

The economy depends on the financial sector to fund its engineering projects. Cities use municipal bonds to fund construction, which are then traded on Wall Street. The financial sector adds extremely is a place where risk capital can find its way to the best projects for society. It is also where risk can be traded and managed so that Main Street can deal with the direct issues without the distraction of financial problems. The financial sector gets paid for taking on the risk of society, so that the rest of society can work safely.

The financial sector also has conceived such tools as “social impact bonds.” The first trial of this in the United States is in New York City, which involves Goldman Sachs investing $9.6 million in a jail program designed to reduce the rate at which Rikers Island prisoners re-offend, which is known as the recidivism rate. If the program reduces recidivism by 10%, Goldman would be repaid the full $9.6 million; if recidivism drops more, Goldman could make up to $2.1 million in profit; if recidivism does not drop by at least 10%, Goldman would lose as up to $2.4 million. Programs like these help allow the government to expand its resources without raising taxes or spending.