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Why Cutting Pay Will Make Goldman Bankers Richer


The financial giant will dodge Main Street's bullet, again.

Should Goldman Sachs (GS) pay its vaunted legions of bankers and traders less money?

According to the Wall Street Journal, some of the dominant global investment bank's major shareholders are answering that question with a big, fat "YES!"

Wall Street pay is a hot issue on Main Street these days. With all that's happened over the past few years with the stock, housing, and job markets, the consensus among regular Americans is that the economy just sucks and probably won't get any better.

And who better to hate than an investment bank that pays its employees more than $700,000 a year on average despite playing a major role in building the bubble and requiring government assistance to survive?

I'm shocked that Goldman's golfing buddies are actually asking it to cut down on the largess. However, populist is the new black, and Goldman has a sudden interest in helping mankind, so I actually believe it's going to happen.

When Goldman reports fourth-quarter earnings, we're going to see a lower allocation for employee compensation and benefits on its income statement relative to previous years.

Oddly enough, it's only going to make Goldman's top bankers and traders even richer. The big dogs at investment banks tend to get more of their pay in restricted stock and/or options, and reducing pay will only increase the value of those stakes.

In 2007, a very good year for Goldman, it paid out about 44% of net revenues in compensation. If Goldman had paid out 39% instead, earnings would have been about 13% higher.

It's simple: Higher earnings lead to higher stock price which leads to more money for luxury sedans and country club memberships.

And there's plenty of room for Goldman to cut pay. Forget the talent retention argument. The hedge fund and private equity worlds are much smaller than they were a few years ago, and Goldman has less competition, thanks to the demise of competitors like Bear Stearns and Lehman Brothers.

Besides, it's not like everyone at Goldman deserves to make a ton of money. In 2003, former Goldman CEO Hank Paulson said that ''in almost every one of our businesses, there are 15% or 20% of the people that really add 80% of the value.'' Paulson later apologized for his "glib and insensitive response," but let's get real -- you don't let something like that slip if you don't think it's true.

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