Higher pay to retain and attract employees impacted Goldman Sachs profits, and the big bank’s CEO says companies across industries are experiencing the same thing.
“There is real wage inflation everywhere in the economy. Everywhere,” Goldman Sachs CEO David Solomon told analysts on the company’s fourth quarter earnings call on Tuesday.
In the final quarter of 2021, the bank logged $3.2 billion in expenses associated with compensation and benefits — a 31% increase compared to the same quarter of 2020. Those costs took a chunk out of the company’s profits; the bank reported a 13% decline in net earnings year-over-year. Shares of Goldman Sachs (GS) sank more than 7% Tuesday morning after disappointing earnings results.
Like other earnings seasons, banks are among the first companies to report results. Solomon’s commentary may foreshadow more anecdotes of higher pay — and more margin compression — through the rest of earnings season.
For workers, higher wages and compensation are a welcome development in a labor market where job searchers appear to have more bargaining power.
Government data shows that employers are trying to fill an elevated 10.6 million jobs, meaning that hiring firms have to pay more to draw in workers. All the while, a record amount of quits (4.5 million in November) suggests that companies need to bump pay for existing workers to keep them from leaving.
In December, average hourly earnings rose 4.7% on a year-over-year basis.
Among banks, those increases appear to be benefitting not only Wall Street analysts, but bank branch employees too. At PNC Financial Services (PNC), personnel costs increased by almost 34% year-over-year as the company boosted its minimum wage to $18 per hour across its network.
‘Deal with it’
The nation’s largest bank, JPMorgan Chase (JPM), reported that it had similarly seen a 14% year-over-year increase in compensation expenses.
“The CEOs shouldn't be crybabies about it. They just deal with it,” JPMorgan Chase CEO Jamie Dimon told analysts Friday.
Despite the margin pressure, banks still reported profits well above 2020 levels. Net income for 2021 came in 66% higher than 2020 at JPMorgan Chase. At Goldman Sachs, net income more than doubled.
At Goldman Sachs, “dealing with it” involves hiring outside of high-cost cities. Solomon told analysts that only about 10% of the over 3,000 employees hired in the last year were in “hub locations” like New York, London, and Hong Kong.
“As a matter of efficiency and strategic priority in terms of sourcing talent and sort of redundancies around the world, we're very deliberately growing headcount in different places,” Solomon said.
Retail-focused banks may also further ramp up investments in automation as wages bid higher. Mike Mayo, a bank analyst for Wells Fargo Securities, has estimated that technological investments could reduce headcount in the banking industry by 200,000 over the next decade.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.