So I keep hearing people say that Wall Street firms exist only for their employees. One guy on Bloomberg TV said that GS only exists for it’s employees; why not get that compensation down and return some of it to shareholders?
As proof that GS exists only for the employees, he states that compensation is 40-50% of net revenues.
OK, so let’s think about this for a second. Is it really true that GS only exists for employees? If someone started a business only for the benefit of the employees, can it really exist for a long time? I tend to doubt that. We have heard so much how awful GS is despite the “muppet” story and Fabulous Fab etc. Are people really that stupid and irrational to keep doing business with these awful people? Or does GS actually provide a service that people want to pay for?
Anyway, first of all let’s think about this 40-50% compensation expense ratio. Banking is a service business and it makes sense that much of the expense in a service business is labor cost. Unfortunately, there isn’t much detail in financial disclosures to calculate labor costs in various industries.
One industry where labor cost is disclosed is the restaurant business, which is a service business. McDonald’s has a breakdown of costs for their owned restaurants. From that we see that owned restaurant labor costs as a percentage of restaurant sales is 25%. But wait a minute; banks and investment banks report revenues as “net” revenues, net of interest expense which is basically their cost of goods sold.
So let’s look at labor costs at McDonalds as a percentage of “net” revenues (revenues less cost of food and paper). That comes to 38%.
So 38% of McDonalds restaurant sales (net of cost of goods sold) go to payroll and benefits. McDonalds, too, then exist only for their employees? By this definition, yes. McDonalds restaurants only exist for the employees.
How about another restaurant? Darden Restaurants is a large chain restaurant. I am not cherry-picking any names here; that’s the first one that came to mind that seems like a ‘typical’ chain restaurant (that runs “owned” restaurants versus franchises them which have different economics).
Labor costs at Darden is 32% of sales. If you exclude cost of goods sold, then labor costs is 45% of “net” sales. So I suppose Darden restaurants too only exist for their employees according to this person that is complaining that GS only exists for their employees.
How about another one? I remember Dimon mentioning newspapers when he commented on this issue.
Again, I am not picking names that make my point. The first pure play newspaper that comes to mind is the New York Times. Wages and benefits at NYT in 2011 were 37% of total revenues. That’s 37%. Yup. New York Times too exist only for their employees.
How does this 37% compare to the evil banks?
Compensation and benefits expense as a percentage of net revenues for the three financial firms I mention often here are:
These are all figures for the full year 2011.
OK, so maybe I am reaching here a little bit. Fine.
Let’s look at this another way then.
People keep saying that GS (and other investment banks and banks) exist only for their employees but let’s look at shareholders.
I already mentioned how great JPM has done for shareholders throughout the crisis. You can see growth in tangible book and book value per share over time, plus JPM pays a nice dividend even now.
Here’s the post on the JPM 2Q.
It looks to me like JPM is doing fine for shareholders.
GS No Good For Shareholders?
OK, fine you say. JPM has a lower compensation ratio than even the New York Times. And they have done well for shareholders over time (management can’t control stock price so you have to look at ROE, growth in BPS etc…).
Let’s see how the poor GS shareholder has done (I’m just cutting and pasting here from an old post):
- The average ROE from 2001-2011 is 17.2%, and for the last five years it’s been 15.1%.
That looks good to me. How many companies have achieved that? I’m sure New York Times shareholders would love performance like that!
BPS for some key years were:
2006 2007 2011
BPS $72.62 $90.43 $130.31
TBPS $61.47 $78.88 $119.72
- Since the peak in 2007, GS grew BPS by +9.6%/year and tangible BPS by +11%/year.
- For five years, the respective growth rates were +12.4%/year and +14.3%/year.
- For the past decade, 2001-2011, BPS grew +13.6%/year.
That looks pretty impressive to me. How many companies have achieved something like this, especially after all that has happened in the past decade?
Anyway, it doesn’t really matter what people say but when people keep saying something over and over without looking at the facts, it gets a little annoying and I can’t NOT point it out. It’s a little disappointing that so many reporters and commentators have been in the business for many, many years and still don’t seem to check the simple facts before commenting. There are a lot of people saying a lot of things all the time and a lot of it has no basis in fact! Beware of these people.