Tuesday, April 20, 2010

Bonus by The Numbers

I remember getting bonuses and stock options at the last two companies I worked for, if we met our numbers. My last company was better at that than the former one was. The bonus I received was usually around 10% of my salary. The “ numbers,” though, were always a mystery to me. What numbers? Was it simply being profitable? Or, did we have to “beat the street?” Beating the street is when we did better than Wall Street analysts predicted, as if they knew anything. They were never right. I also wish I had kept those first stock options I received when the stock price was real low. I would now have a good sized chunk of change. But, I spent it.
Take Goldman Sachs, for example. Analysts predicted that its revenue would be around $10 billion in its first quarter of 2010. Well, it released its 2010 Quarterly (Q1) financial statements today and its revenue came in at $12.78 billion, way above analysts' estimates. I guess that means big bonuses, and that appears to be the case. The first thing that grabs me is the size of the amount set aside for staff compensation, i.e., bonuses and presumably salaries and benefits, $5 billion according to this article, a whopping 39% of total revenue. The next thing that's surprising is that at around $161.00 per share, Goldman's stock is cheap since it is only 6 or 7 times earnings, depending on where you get your stock quote. If Goldman's P/E ratio was around the industry average, approximately 22.7, the stock price would be around $570. So, if you bought 100 shares, you could expect to turn your $16,100 into $57,000 in a relatively short time. That's tempting. It's also a good time for Goldman to get the stock option letters ready so they can be sent to select employees when the stock price hits a low point. If the CEO gets one million shares, he can make $410 million over the next year or so, assuming he can exercise the options. Companies always take advantage of low stock prices to issue those stock option letters.

$12.78 Billion
1 st Quarter 2010
Number of Employees

Revenue per Employee
Industry Avg Rev/Employee
As of 12/31/09
Compensation set aside
$5 Billion
1 st Quarter
Compensation per Employee


Net Income
$3.3 Billion

Net Income/Revenue
Revenue less Compensation
Shares Outstanding
526.3 Million

Earnings Per Share (EPS)
1 st Quarter 2010
Stock Price

Price to Earnings Ratio (P/E)
Gross Profit Margin

Operating Profit Margin

Net Profit Margin

The compensation set aside from the first quarter gives each employee $156,250. That's probably close to the average Goldman salary. So, the compensation taken out of this coming quarter needs to cover benefits, probably another 30% of salaries, and after that it's all gravy – bonuses.
But, the SEC civil suit is likely to encourage the Royal Bank of Scotland (RBS) to sue as well, since it was the biggest loser, $841 million, in the Abacus deal. Then there is IKB Industrial Bank of Germany. Britain and Germany had to bail out those banks, so those countries may be in line to sue Goldman or worse. So, Goldman doesn't yet know whether it's better to settle or fight, although it says it's going to fight. It would be a good time to be a fly on the boardroom wall for the final answer: Will the stock price go lower? Or higher? It's too soon to tell. I think it will go lower, so hold off on buying it, if your conscious will allow you to buy it at all.
But, the numbers sure look good. It looks like Goldman is going for a record bonus year, at least 25% above its past five years, not counting 2008 when it apparently had a very low year. The average labor cost for 2006 through 2009, excluding 2008, was $15.9 billion, 25% of the average revenue of $65.6 billion per year. At $5 billion per quarter this year, it will exceed the average labor cost by $5 billion for the year.
Then there are those enormous profit margins and those are only the numbers from 2009. What would the gross profit margin (GPM) be if the first quarter of 2010 is included? I can't get my mind around an 80.29% GPM when $5 billion are retained for compensation. There's something obscene about that. It looks too much like greed to me.

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