Goldman Sachs 2003 Annual Report Download - page 45

Management’s Discussion and Analysis
GOLDMAN SACHS 2003 ANNUAL REPORT 43
2003 versus 2002 – Operating expenses were $11.57
billion for 2003, 8% above 2002. Compensation and
benefits expenses of $7.39 billion increased 10% com-
pared with the prior year, with higher discretionary
compensation more than offsetting lower levels of
employment. The ratio of compensation and benefits to
net revenues for 2003 was 46%, down from 48% for
2002, in part reflecting lower employment levels in
2003, which decreased 1% compared with November
2002. Excluding 1,037 employees associated with our
combination with Ayco, employment levels were down
7% from November 2002. Effective for fiscal 2003, we
began to account for stock-based compensation in
accordance with the fair-value method prescribed by
SFAS No. 123, “Accounting for Stock-Based
Compensation,” as amended by SFAS No. 148,
“Accounting for Stock-Based Compensation—
Transition and Disclosure,” using the prospective adop-
tion method. The adoption of the recognition
provisions of SFAS No. 123 did not have a material
effect on our results of operations, principally because
substantially all of the employee equity-based compen-
sation granted for 2003 was in the form of restricted
stock units. See Note 2 and Note 12 to the consolidated
financial statements for further information regarding
our stock-based compensation.
Non-compensation-related expenses of $4.05 billion for
2003 increased 10% compared with 2002. This increase
was primarily due to (i) higher professional services and
other expenses, which included provisions of $159 mil-
lion for a number of litigation and regulatory proceed-
ings; (ii) increased amortization of identifiable intangible
assets, reflecting impairment charges of $188 million, pri-
marily in respect of option specialist rights; and (iii) exit
costs of $153 million associated with reductions in our
global office space. These exit costs were primarily
reflected in occupancy expenses, with the balance in
depreciation and amortization expenses. Excluding the
aggregate charges of $500 million described above, our
non-compensation expenses declined slightly compared
with 2002, reflecting lower depreciation and amortiza-
tion, communications and technology, and market devel-
opment expenses, and brokerage, clearing and exchange
fees. These expense declines were primarily due to the
impact of reduced employment levels, lower levels of busi-
ness activity and continued cost-containment discipline.
See “— Critical Accounting Policies — Goodwill and
Identifiable Intangible Assets” for a discussion of our
impairment charges in respect of option specialist rights
and “— Capital and Funding — Contractual Obligations
and Contingent Commitments” for a discussion of our
excess office space.
Throughout 2003, we maintained our focus on cost con-
tainment in light of the continued challenging environ-
ment for certain of our businesses. We reduced
employment levels and continued to closely manage our
non-compensation expenses through expense-reduction
initiatives first implemented in 2001. These initiatives
were largely focused on reducing expenses in areas such
as travel and entertainment, advertising, consulting,
telecommunications and occupancy-related services. In
addition, we continued to defer or scale back some of our
noncritical capital reinvestment plans in order to limit
growth in our depreciation and amortization expenses.
2002 versus 2001 – Operating expenses of $10.73 bil-
lion for 2002 decreased 11% compared with 2001.
Compensation and benefits expenses of $6.74 billion
decreased 12% compared with 2001, primarily due to
lower discretionary compensation, reduced employment
levels, and lower consultants and temporary staff
expense. The ratio of compensation and benefits to net
revenues for 2002 was 48% compared with 49% for
2001. Employment levels decreased 13% from
November 2001. Employee equity-based compensation
granted for 2002 included roughly equal amounts of
restricted stock units and stock options. See Note 2 and
Note 12 to the consolidated financial statements for further
information regarding our stock-based compensation.
The following table sets forth our operating expenses and number of employees:
OPERATING EXPENSES AND EMPLOYEES
YEAR ENDED NOVEMBER
($ IN MILLIONS) 2003 2002 2001
Compensation and benefits $ 7,393 $ 6,744 $ 7,700
Amortization of employee initial public offering and acquisition awards 122 293 464
Non-compensation expenses 4,052 3,696 3,951
Total operating expenses $11,567 $10,733 $12,115
Employees at year end(1) 19,476(2) 19,739 22,677
(1) Excludes employees of Goldman Sachs’ property management subsidiaries. Substantially all of the costs of these employees are reimbursed to
Goldman Sachs by the real estate investment funds to which these companies provide property management and loan services.
(2) Includes 1,037 employees associated with our combination with Ayco, a provider of fee-based financial counseling in the United States, in July 2003.