Friday, October 13, 2006

Picking 'Partner Managing Directors' at Goldman Sachs

Very interesting Page One article in today's WSJ here about the process followed by the venerated Goldman Sachs in picking the highest level of Partner in their firm: the "Partner Managing Director." In the Wall Street world where "stars" rule, Goldman has done a masterful job of keeping its tight-knit team culture.
The article drives home the point that the highest-potential talent are driven by counting themselves among the "best-of-the-best" rather than money alone.
Here is the full text of the article from Susanne Craig:
In June, top executives at Goldman Sachs Group Inc. began compiling lists of candidates for one of Wall Street's most exclusive clubs -- the 300 or so "partners" who take home a big chunk of the firm's profits.

Candidates were divided by letter grade into three categories -- A's, B's and C's. The C's were the long shots. "I can tell you that for anyone who is a B or a C in this process, it's the first time in their lives they've ever been ranked that," says Gary Cohn, Goldman's co-president, who oversees the process.
It's one of the business world's most lucrative and secret sweepstakes: Goldman's selection of its elite "partner managing directors," or PMDs. It dates back to Goldman's roots as a private partnership, in the days when that's how big Wall Street firms were run. Goldman went public in 1999. But every two years, in an effort to retain the clubby culture of old, Goldman anoints about 100 PMDs. Being inducted is considered a ticket to huge riches.
"On Wall Street, this club is the endgame and it is the best corporate motivation tool I have ever seen," says Glenn Schorr, an analyst who covers Goldman for UBS AG.
Goldman will announce on Oct. 25 its new class of partners, who will join the 287 who currently hold that title. Last year, that group shared more than $2 billion, or about 20% of the total compensation Goldman paid to its more than 25,000 employees world-wide, according to people familiar with the matter. That averages out to about $7 million per partner.
Goldman's partners also are offered opportunities to invest beside the firm when it buys stakes in other companies, which can be lucrative. Such offers aren't typically available to other Goldman executives. They can buy Goldman shares at a 25% discount. The firm prepares their taxes. Goldman will even book tables for them at hot New York restaurants such as Babbo and Spice Market.
Some receive bigger paychecks than their bosses. Mark McGoldrick, who became a partner in 2000 and heads a group that invests the firm's own money, earned about $40 million last year, according to people familiar with the matter, eclipsing his boss, Goldman Chairman and Chief Executive Lloyd Blankfein, a partner who earned $30.8 million in 2005.

How Goldman Sachs is picking this year's class of "partners":
April 3: Division heads begin selecting people who may vet potential partner candidates.June: Division heads list their top choices for candidates; current partners from each division discuss candidates.
July 10: The partner nomination process starts.
Aug. 14: The vetting begins.
Oct. 2: Goldman senior management meets with vetting captains for status report.
Oct. 19: CEO Lloyd Blankfein is scheduled to meet with firm presidents Gary Cohn and Jon Winkelried to review the final list of candidates.
Oct. 23: Senior management meets to review the candidates.
Oct. 24: Mr. Blankfein finalizes the list.
Oct. 25: New partners are announced.
Goldman's partners have the best of two worlds. As a public company, Goldman can raise large amounts of cash easily. Yet in some ways, it still takes care of its top people as if it were a private firm.
Goldman's top money-makers, referred to within the firm as "commercial killers," have the best shot at making partner. In 2004, just four of those selected came from divisions that don't produce revenue, such as the legal department.
The firm won't discuss this year's candidates or comment on partner compensation. In 2004, 237 people were nominated, 174 were vetted by partners, and just 99 were selected, including only 14 women.
The seven-month selection process, which started this year on April 3, has long been the subject of Wall Street speculation -- about those in line to make the cut and about those who fall short. Eight of the 23 members of Goldman's management committee agreed to talk about what goes on behind the scenes, as did a number of current and former partners.
Top executives who vet candidates never interview the up-and-comers under consideration, opting instead to discuss them with other partners. When final decisions are made, Mr. Blankfein is likely to break the good news to the new partners. Those who don't make it get the bad news from division heads. Few candidates ever find out why they made or missed the cut.
"My entire goal when I was up for partner was to not step on any land mines, keep my head down and continue to perform," says Michael Daffey, co-head of Goldman's European stocks group, who made partner in 2002.
The also-rans are sometimes reconsidered two years later, but often their Goldman's careers are effectively over. The winners who don't subsequently perform up to expectations are sometimes quietly asked to leave.
Investment banker George Foussianes was turned down at least twice. He had worked in various departments at Goldman, leaving him with no single partner to champion him, which hurt his chances, people familiar with the process say. He left Goldman last year for a top post at HSBC Holdings PLC. Mr. Foussianes says he was disappointed by the outcome, but viewed the process as valuable.
Mark Slaughter, a Harvard-educated lawyer who worked in the investment-banking division, was passed over more than once before he left Goldman in 2005 for a senior post at Citigroup Inc. He declined to comment. Robert Hottensen, a highly ranked Goldman stock analyst, also twice missed the cut and left. Mr. Hottensen says he was "extremely disappointed" but that the possibility of making the club motivated him to work harder.
This week, Joseph Stevens, a top Goldman banker in China, caused a stir within the firm when he quit to join Standard Chartered PLC, taking himself out of the running for partner amid rumors he wouldn't make the cut. Mr. Stevens heard the rumors, he says, but was told he had a "strong shot" at making partner. He says he left because he wanted Goldman's top job in China, a position currently held by someone else. Goldman declined to comment on Mr. Stevens's decision.
For years since Goldman's founding in 1869, anyone who joined the firm and showed promise had a good shot of becoming partner. Until a couple of decades ago, the firm was much smaller and kept the number of partners to a minimum; in 1982 there were just 70.
The stakes for this year's class are high. In recent quarters, Goldman has been posting impressive quarterly profits -- $1.59 billion in the third quarter -- and its stock is up 40% so far this year, eclipsing the 17% gain for the Dow Jones Wilshire U.S. Financial Services Index. As some other large securities firms have pushed to become global financial supermarkets, Goldman, the world's No. 1 merger-advisory firm, has moved deeper into trading and investment banking. It has put more of its own money on the line both to trade and to invest in other companies, a move that has increased risk but beefed up profits.
Goldman's partners have always viewed their firm as a cut above the rest of Wall Street. Mr. Blankfein, a hard-driving former gold salesman who took the top job at Goldman in June, likes to refer to an intangible secret sauce that makes Goldman smarter and savvier than its competitors. Although Goldman is known for the fat pay partners receive, Mr. Blankfein bristles at the suggestion that money-making is all that drives his partners and the firm's selection process.
Successful partner candidates are expected to be "culture carriers," he says. The firm encourages public service by partners, he says, and many partners have pursued that path, including former Chief Executive Officer Henry Paulson Jr., who is now Treasury Secretary. "Sure, Goldman partners make a lot," Mr. Blankfein says. "But I can pay people a lot of money without going through this process."
At other Wall Street firms, executives typically aspire to become managing directors, a title that often comes with perks ranging from the right to buy firm stock at a discount to membership at the corporate gym. Goldman has 950 managing directors, who are referred to internally as "MD light," because that position is viewed as a stepping stone to becoming a partner, or PMD. Goldman Co-President Jon Winkelried, who oversees the selection process with Mr. Cohn, says making partner is viewed as the real beginning of a career at the firm.
The selection process is managed by a partnership committee chaired by senior partners Kevin Kennedy and Eric Schwartz. Messrs. Cohn and Winkelried oversee the process, and Mr. Blankfein gets the final say. Candidates often are sponsored by a partner. But lobbying is frowned upon, and can actually work against candidates.
In the mid-1990s, then senior partners Stephen Friedman and Robert Rubin, who have since joined other companies, developed a system to vet candidates. They dubbed the process "cross-ruffing," a reference to a complex bridge maneuver. At Goldman, it is the process by which partners review candidates from other departments. Investment-banking partners, for example, will review candidates from asset management.
This June, after grades were assigned to candidates on the preliminary list, partners in each division met to narrow the field. About 25% of the candidates are almost assured partnership, accords to Messrs. Cohn and Winkelried. Candidates who got C's were deemed unlikely to make it this time around, although some might have a shot down the road.
Goldman puts together teams of partners who cross-ruff the candidates. Team members are trained in what the firm is looking for and how to question their fellow partners about candidates in a consistent way. Among other things, they are told to ask about performance on specific assignments and about contributions outside of their departments.
Questioners are provided with a white binder containing the candidate's color photo, his or her performance review -- which includes feedback from peers, subordinates and bosses -- and a list of partners who know the candidate. Often, the questioner has never even met the prospective partner.
During the last selection process, in 2004, research strategist Abby Joseph Cohen led the cross-ruffing group for Goldman's asset-management division. One candidate, Tom Kenny, was a stranger to her. She interviewed more than a dozen partners before coming to a decision about him.
"He hasn't been here long, but his numbers are great and he is respected as a leader," Ms. Cohen says she said during a meeting with the firm's top brass just before they voted to make Mr. Kenny a partner.
Soon, Goldman's partnership committee and partners in each division will meet to hash out the names one last time. Messrs. Blankfein, Cohn and Winkelried plan to confer next week to review the final choices. Those selections will be voted on by the management committee on Oct. 23.
Turning hotshots into partners is no guarantee that they'll stick around. George H. Walker, a second cousin of President Bush and a rising star on Wall Street, became a partner in 1998 but left Goldman earlier this year to join rival Lehman Brothers Holdings Inc. He will run the firm's investment-management group and join the firm's executive committee. Mr. Walker, 37, might have had to wait years for this type of promotion at Goldman. Mr. Walker didn't return calls for comment.
Nevertheless, Goldman hopes the partnership process will help it retain talent in the face of competition from hedge funds, which have been paying top dollar for star traders. Increasingly, Goldman has tied partner compensation to individual performance rather than to the firm's performance. These days, about half of the partner compensation pool is discretionary, according to people familiar with the matter, allowing the firm to reward big producers.
"There are plenty of firms who would like to hire our people, but the pull of the partnership is still a very powerful incentive to stay," says Mr. Cohn.

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