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Morning Coffee: How Goldman Sachs calculates its bonus pool. Morgan Stanley culture under Ted Pick

Goldman Sachs announced some bonuses yesterday, and it will continue to announce more bonuses today and tomorrow. When it does, some of the recipients may be disappointed. As we have remarked already, neither Goldman Sachs nor Morgan Stanley seem in much of a position to pay big bonuses this year.

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There was some discussion of Goldman's compensation constraints in yesterday's results call with Goldman executives and the equity analysts at rival banks who appraise whether the firm is worth investing in.

Given that Goldman wants to achieve a 15% return on equity in the medium term versus 7% last year, or 10% when charges are excluded, Mike Mayo at Wells Fargo wanted to know how Goldman plans to achieve that. And given that Goldman aspires for costs to consume 60%, of revenues, but that last year they consumed something closer to 65%, analysts wanted to know how Goldman plans to cut operating leverage while continuing to spend money paying people, given that compensation accounts for 44% of operating expenses. 

The answer, said Goldman CFO Denis Coleman, is that Goldman plans to drive "scale across the platform," which is shorthand for increasing revenues without increasing costs and pay. Goldman will remain focused on "pay for performance," said Coleman.  

Coleman then elaborated how Goldman will determine its compensation and bonus payments for 2024. First, he said it will look at the "mix of activities," in its businesses, implying that some merit higher bonuses than others. Then, he said it will consider, "the appropriate amount of compensation to reflect the performance of the team being mindful of talent retention." Lastly, he said attention will go to, "service of clients as well as driving operating leverage and delivering results for shareholders." 

This all goes into the bonus pot, which spits out a number for the bonus pool. Thereafter, teams battle over bonus allocations, but Coleman was less forthcoming on that. 

Separately, if you're looking for a pithy description of the culture at Morgan Stanley under new CEO Ted Pick, then Pick himself has provided one.

Speaking during his own investor call yesterday, Pick said Morgan Stanley is all about "positive mojo "combined with "consistency, rigor durability." This is exactly how Morgan Stanley was under ex-CEO James Gorman, said Pick: "The tone is one of determination." 

Less promisingly, Pick said Morgan Stanley is fine with not being a first or second place player in the investment banking and sales and trading. While there's no intention of withdrawing from the investment bank, he said there's also no intention of "looking to chase the ball simply to have wallet share." 

Meanwhile....

Revenues in Goldman's equities business were three times higher than expected. (Bloomberg) 

Goldman Sachs shares have rallied 30% since October and are now only 10% below their all-time high. It may be difficult to sustain this, though. (Financial Times) 

Morgan Stanley burned Blackstone and Oaktree with its block trading scam. (Bloomberg) 

Ted Pick said the margin in Morgan Stanley's wealth business will eventually hit 30%. (Financial Times) 

Morgan Stanley spent 45.4% or revenues paying staff, higher than for any of the previous five years. (Bloomberg) 

Goldman Sachs and Morgan Stanley executives think the dealmaking drought might be over. “Strength and sentiment should support broad M&A and new capital market issuance, and eventually feed through to the broader market activity.” (Bloomberg) 

Alantra hired Credit Suisse banker Patrick Porritt as managing director of financial institution coverage. (Reuters) 

Citi revenues rose 4% last year, but expenses rose twice as fast. (Institutional risk analyst) 

ExodusPoint hired more than 35 portfolio managers last year. (Business Insider) 

MBAs who've spent $200k on their courses, can't find jobs - including in the industries they used to work in. One Harvard M.B.A. living in Boston said he couch-surfs in New York to network for jobs there in person. (WSJ) 

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AUTHORSarah Butcher Global Editor

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