If you see the ship's crew vaulting over the gang rail it is probably time to head for the lifeboats. So, does the unusually high number of partners that have left Goldman Sachs in the past few months mean that the US bank's shareholders can expect to experience a sinking feeling?
Is the bank making senior staff walk the plank in an attempt to rein in costs, or are partners leaving by the dozen because they fear more stormy weather on Wall Street or are worried about the seaworthiness of Goldman Sachs?
In the past few weeks, Edward Forst has quit as co-head of the bank's asset management division, Kevin Kennedy has retired as head of Latin America, and the bank's co-head of Asia, Yusuf Alireza, has stepped down. Other long-standing partners have also quit this year, including Julian Metherell, head of UK investment banking; Stephen Hickey, global head of leveraged finance; Jeff Resnick, global head of commodities trading; and Glenn Earle, chief operating officer in Europe.
It's not as if Goldman Sachs doesn't already have enough problems to deal with. In the past year, its share price is down nearly 40% and it is currently trading at 0.8 times book. The bank's model is listing and under threat from regulators. Its public image is trading lower than Greek sub-prime CDOs. It made its second quarterly loss in the third quarter this year, underlying pre-tax profits tumbled 56% in the first nine months of 2011, and annualised pre-tax return on equity was a miserable 8%, compared with 24% at JP Morgan.
Combine this with the apparent exodus, and you have a potent narrative – one that many rivals have been more than happy to latch on to.
Except for one thing: it appears that there is no exodus nor any cull. A more detailed analysis of the comings and goings of partners at Goldman Sachs shows that, if anything, partner turnover has slowed down. And, while trying to emulate Goldman Sachs has got many banks into trouble in the past, the analysis also points to a more sustainable model for the rest of Wall Street.
Partners: a class apart
Partners at Goldman Sachs aren't really partners at all since Goldman Sachs went public in 1999. But, in order to maintain the partnership ethos at the firm, Goldman Sachs created an elite class of über-managing directors called partners. When times are good, they are paid disproportionately better, averaging high single-digit millions of dollars. When times are bad, they are hit disproportionately harder. In 2008, average partner earnings fell by 80%. From 221 partners when Goldman Sachs went public, there are roughly 470 of these gilded beasts today.
Becoming a partner is easy. You just have to bring in lots of money, demonstrate teamwork and total commitment to Goldman Sachs, and pass one of the most rigorous selection procedures known to mankind. In exchange, you are set for life (although you have to keep any stock you earn for at least five years and must always own a minimum of 25% of your stock until the day you retire).
Goldman Sachs tends not to volunteer the names and details of partners who leave, but Financial News has identified 22 partners who have quit or announced their intention to do so this year – less than 5% of the total pool. Of course, other partners may have quietly left this year, but it is quite difficult for Goldman Sachs partners to slip out the back door unnoticed.
That compares with 26 actual departures last year, 36 in 2009 and 48 in a bloody 2008, according to a laborious analysis of Goldman Sachs annual reports over the past four years. Other partners will no doubt leave this year – either because they are pushed or because the outlook is not getting any better anytime soon. But, unless there is a night of the long knives in the next few weeks, talk of a "cull" or "exodus" seems inappropriate.
A powerful incentive
In fact, the analysis shows that far from leaking partners, Goldman Sachs might point to a future model for other banks. The risk here for Goldman Sachs is that one reason its model has worked for the past decade is that none of its main rivals has an equivalent. The head of investment banking at one rival firm (himself a Goldman Sachs alumnus) recently said that the partnership culture is something to which other banks should aspire, in spirit, if not in practice. Here's why.
The unusual kudos and wealth attached to the partnership act as a powerful motivating force to encourage staff at Goldman Sachs to commit to the firm. One analyst covering Wall Street has called it the most "powerful tool of corporate motivation ever invented".
This does wonders for staff retention. Partners at Goldman Sachs have a "half-life" of between six to eight years. Including the known departures this year, just 10% of the 94 partners elected in 2008 have since left. As a random (and unfair) example, compare that with the 60% departures in just three years at the top of the markets division at Bank of America Merrill Lynch.
Nearly three quarters of the 115-strong class of 2006 are still with the bank. Half of the 78 partners elected in 2002 are still in situ, as are one quarter of those promoted in 1998. Overall, the annual attrition rate of departures from each "class" runs at high single digits for the first six or seven years, and then low double digits thereafter. (Kennedy was the last man standing from the class of 1984 – but he'd been a partner for 27 years.) Once in place, partners are almost impossible to prise away from the bank unless they screw up, are promised a truly ridiculous amount of money or a stupidly premature promotion.
The partner model has helped increase average staff tenure at Goldman Sachs from four years in 2001 to 5.5 years today, according to a recent presentation by chief executive Lloyd Blankfein (class of 1988).
This, in turn, creates an unusually high level of experience at Goldman Sachs. The same presentation showed that the average experience at Goldman Sachs on the management committee is 21 years, compared with 13 years for the executive committee at Deutsche Bank's corporate and investment bank and nine years at UBS investment bank. A departing partner is replaced with another with only marginally less experience – the two partners taking on Kennedy's roles were promoted in 1998 and 2002.
The partnership model encourages a more ruthless approach to "up or out" management. Partners are not expected to hang around like a bad smell for decades. The constant pressure from below encourages them to pack their bags at the right time, and also results in a regular winnowing of those MDs below them who fail to make the cut.
The structure also gives Goldman Sachs greater flexibility over compensation than its rivals. Across Wall Street, the average accrued compensation bill fell by just 5% in the first nine months of this year, despite a 10% drop in revenues and 36% collapse in pre-tax profits. The only firm that demonstrably reduced compensation was Goldman Sachs, which slashed it by 24%. This is partly because Goldman Sachs doesn't pay ridiculous levels to its army of vice-presidents and managing directors. It reserves the silly money for its partners.
The partnership, however, is not an ever-expanding circle. In 2012, the bank will most likely appoint another 100 or so partners. Which means that between the last partnership election in 2010 and the end of next year, roughly 100 partners will have to leave – 22 down, some 78 to go. Some will be pushed, others will jump. But there are certainly no signs of an exodus.
This column first appeared on Financial News. William Wright is a columnist on investment banking.
Write to William Wright at William.Wright@dowjones.com