What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences Read Online Free Page B
Author: Steven G. Mandis
12
As a Goldman partner explained to me in an interview, Goldman was
slowly losing its allure: the prestige of partnership, the mystique that had
always marked the difference between Goldman and its competitors. 13 At the time of the IPO, no one knew that Goldman would (or would have
to, as explained in some interviews with partners) become the highest-paying
firm on Wall Street. It had traditionally paid less than its peers, except
for partners, a business practice Whitehead felt reflected long-term greedy
and attracted the right people who had this perspective. Before the IPO,
Goldman partners made outsized returns, in part by pocketing the difference
in lower compensation for the nonpartners. One partner with whom I spoke
said that what made Goldman unique was that it found really smart and
dedicated people with certain values to “drink the
Kool-Aid” and buy into the culture instead of taking more money.
He felt, over time, people didn’t value the
“Kool-Aid” or buy into the culture enough anymore, and
Goldman raised the compensation level to be competitive—another
signal of the drift at the firm. Goldman was not special enough, its culture
not distinct enough, the value of the partnership not high enough for people
to be “long-term greedy” and accept lower pay for a
long period of time.
In addition, Goldman faced heated new competition for talent from
other firms as well as other opportunities. The firm reacted by
significantly increasing compensation, becoming the highest-paying firm on
Wall Street. Also, compensation per employee increased with the profits from
proprietary trading and growth—and the changes. For example, in
2004 the average compensation per employee at Goldman was $445,390, compared
with $279,755 and $199,230 at J.P. Morgan and Lazard, respectively. In 2007,
the numbers were $661,490, $311,827, and $466,003 for Goldman, J.P. Morgan,
and Lazard. 14 According to interviews, before Goldman went public, it typically
paid its nonpartners less than its peers paid their nonpartners.
The idea of making partner, and its social meaning and identity,
had been taken down a notch—or at least there was a market price
for it. Before the IPO it was highly unusual for retired Goldman partners to
work at other firms, but after the IPO this phenomenon increased. Many
partners who had just made their fortunes in the IPO were primed to retire,
and when they left, they took not only their money but also their expertise
and their knowledge and respect for the firm’s history and
traditions. Of 221 total partners at the IPO in 1999, only 39 (16 percent)
remained as of 2011. 15
Changes in the Social Network of Trust
The net $2.6 billion in proceeds raised by the IPO allowed
Goldman to expand rapidly, and the partnership pool grew to meet the demands
created by rapid growth, changing what had once been a close social network.
The firm had started selectively hiring more lateral senior people in the
mid-1980s, and this accelerated in the 1990s as the firm grew. But after the
announced and expected retirements after the IPO, hiring outsiders as
partners became a necessity. Within five years of the IPO, almost 60 percent
of the original partners were gone. Goldman did not have the luxury of time
to build product and geographic expertise from within.
According to the partners I interviewed, the priority of
recruiting, training, and mentoring changed. The process of identifying and
nurturing partner candidates was pushed aside in favor of those who could
show immediate results—metrics, revenue production, and Super
League relationships—and measurable results such as a trading
P&L. And if the firm did not have the right people, the feeling
was that it could hire them from other firms by using the valuable currency
of Goldman stock. The firm’s executives did not want to wait and
slowly develop people
As a Goldman partner explained to me in an interview, Goldman was
slowly losing its allure: the prestige of partnership, the mystique that had
always marked the difference between Goldman and its competitors. 13 At the time of the IPO, no one knew that Goldman would (or would have
to, as explained in some interviews with partners) become the highest-paying
firm on Wall Street. It had traditionally paid less than its peers, except
for partners, a business practice Whitehead felt reflected long-term greedy
and attracted the right people who had this perspective. Before the IPO,
Goldman partners made outsized returns, in part by pocketing the difference
in lower compensation for the nonpartners. One partner with whom I spoke
said that what made Goldman unique was that it found really smart and
dedicated people with certain values to “drink the
Kool-Aid” and buy into the culture instead of taking more money.
He felt, over time, people didn’t value the
“Kool-Aid” or buy into the culture enough anymore, and
Goldman raised the compensation level to be competitive—another
signal of the drift at the firm. Goldman was not special enough, its culture
not distinct enough, the value of the partnership not high enough for people
to be “long-term greedy” and accept lower pay for a
long period of time.
In addition, Goldman faced heated new competition for talent from
other firms as well as other opportunities. The firm reacted by
significantly increasing compensation, becoming the highest-paying firm on
Wall Street. Also, compensation per employee increased with the profits from
proprietary trading and growth—and the changes. For example, in
2004 the average compensation per employee at Goldman was $445,390, compared
with $279,755 and $199,230 at J.P. Morgan and Lazard, respectively. In 2007,
the numbers were $661,490, $311,827, and $466,003 for Goldman, J.P. Morgan,
and Lazard. 14 According to interviews, before Goldman went public, it typically
paid its nonpartners less than its peers paid their nonpartners.
The idea of making partner, and its social meaning and identity,
had been taken down a notch—or at least there was a market price
for it. Before the IPO it was highly unusual for retired Goldman partners to
work at other firms, but after the IPO this phenomenon increased. Many
partners who had just made their fortunes in the IPO were primed to retire,
and when they left, they took not only their money but also their expertise
and their knowledge and respect for the firm’s history and
traditions. Of 221 total partners at the IPO in 1999, only 39 (16 percent)
remained as of 2011. 15
Changes in the Social Network of Trust
The net $2.6 billion in proceeds raised by the IPO allowed
Goldman to expand rapidly, and the partnership pool grew to meet the demands
created by rapid growth, changing what had once been a close social network.
The firm had started selectively hiring more lateral senior people in the
mid-1980s, and this accelerated in the 1990s as the firm grew. But after the
announced and expected retirements after the IPO, hiring outsiders as
partners became a necessity. Within five years of the IPO, almost 60 percent
of the original partners were gone. Goldman did not have the luxury of time
to build product and geographic expertise from within.
According to the partners I interviewed, the priority of
recruiting, training, and mentoring changed. The process of identifying and
nurturing partner candidates was pushed aside in favor of those who could
show immediate results—metrics, revenue production, and Super
League relationships—and measurable results such as a trading
P&L. And if the firm did not have the right people, the feeling
was that it could hire them from other firms by using the valuable currency
of Goldman stock. The firm’s executives did not want to wait and
slowly develop people
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