Goldman Sachs 2004 Annual Report Download - page 45

GOLDMAN฀SAC H S ฀ 2004฀ A N N U A L ฀ R E P ORT ฀ ฀ ฀ 4 3
management’s฀discussion฀and฀analysis
management’s฀discussion฀and฀analysis
GOLDMAN฀SAC H S ฀ 2004฀ A N N U A L ฀ R E P ORT ฀ ฀ ฀ 4 3
generally targeted at 50% (plus or minus a few percentage
points) of consolidated net revenues. In addition to the level of
net revenues, our compensation expense in any given year is
also influenced by, among other factors, prevailing labor mar-
kets, business mix and the structure of our equity-based com-
pensation programs.
2004฀vers u s฀2 0 03฀– ฀Operating expenses were $13.87 billion
for 2004, 20% above 2003. Compensation and benefits
expenses of $9.59 billion increased 30% compared with 2003,
due to higher discretionary compensation, reflecting higher net
revenues, and increased employment levels. The ratio of com-
pensation and benefits to net revenues for 2004 was 46.7%
compared with 46.2% for 2003. Employment levels increased
6% compared with November 2003. The adoption of the rec-
ognition provisions of SFAS No. 123, “Accounting for Stock-
Based Compensation,” as amended by SFAS No. 148,
“Accounting for Stock-Based Compensation — Transition and
Disclosure,” in fiscal 2003 did not have a material effect on our
results of operations in 2004 or 2003, because substantially all
of the employee equity-based compensation granted for each
year 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 $4.22 billion for 2004
increased 4% compared with 2003. Other expenses included
net provisions for litigation and regulatory proceedings of
$103 million for 2004 compared with $159 million for 2003.
Excluding these provisions, other expenses increased $258 million,
primarily due to the acquisition of consolidated entities held for
investment purposes, increased levels of business activity and
higher charitable contributions. Brokerage, clearing and
exchange fees increased, reflecting higher transaction volumes in
certain of our businesses, and market development expenses
were higher, primarily reflecting $62 million in connection with
our establishment of Goldman Sachs Gao Hua Securities
Company Limited in China, as well as higher levels of business
activity. In addition, professional fees were higher, primarily due
to higher legal and consulting fees. These increases were partially
offset by decreased amortization of identifiable intangible
assets (2003 included impairment charges of $188 million,
primarily in respect of option specialist rights) as well as lower
occupancy and depreciation and amortization expenses. Total
exit costs associated with reductions in our global office space,
which were included in occupancy and depreciation and
amortization expenses, were $41 million for 2004 compared
with $153 million for 2003. See “— Critical Accounting
Policies — Goodwill and Identifiable Intangible Assets” included
above for a discussion of our impairment charges in respect of
option specialist rights and “— Capital and Funding — Contractual
Obligations and Contingent Commitments,” included below, for
a discussion of our excess office space.
2003฀vers u s฀2 0 02฀– ฀Operating expenses were $11.57 billion
for 2003, 8% above 2002. Compensation and benefits expenses
of $7.39 billion increased 10% compared with 2002, with
higher discretionary compensation more than offsetting lower
levels of employment. The ratio of compensation and benefits to
net revenues for 2003 was 46.2%, down from 48.2% for 2002,
in part reflecting lower employment levels in 2003, which
decreased 1% compared with November 2002. Excluding
employees associated with our combination with Ayco, employ-
ment levels were down 7% from November 2002. Effective for
fiscal 2003, we began to account for stock-based compensation
The following table sets forth our operating expenses and number of employees:
operating฀expenses฀and฀employees
฀ ฀ YEAR฀ENDED฀NOVEMBER
($฀IN฀MILLIONS)฀ 2004฀ 2003฀ 2002
Compensation and benefits $฀฀9,591 $฀฀7,393฀฀ $฀฀6,744
Amortization of employee initial public offering
and acquisition awards 61 122฀ 293
Non-compensation expenses 4,222 4,052฀ 3,696
Total operating expenses $13,874 $11,567฀฀ $10,733
Employees at year end(1) 20,722 19,476฀฀ 19,739
฀
(1)฀฀
Excludes฀1,206,฀1,228฀and฀876฀employees฀as฀of฀November฀2004,฀November฀2003฀and฀November฀2002,฀respectively,฀of฀Goldman฀Sachs’฀consolidated฀property฀
management฀and฀loan฀servicing฀subsidiaries.฀Compensation฀and฀benefits฀includes฀$164฀million,฀$134฀million฀and฀$140฀million฀for฀the฀years฀ended฀November฀2004,฀
November฀2003฀and฀November฀2002,฀respectively,฀attributable฀to฀these฀subsidiaries,฀the฀majority฀of฀which฀is฀reimbursed฀to฀Goldman฀Sachs฀by฀the฀investment฀
funds฀for฀which฀these฀companies฀manage฀properties฀and฀perform฀loan฀servicing.฀Such฀reimbursements฀are฀recorded฀in฀net฀revenues.฀All฀three฀years฀exclude฀
employees฀of฀certain฀consolidated฀entities฀that฀are฀held฀for฀investment฀purposes฀only.
BES฀•฀Phone฀(201)฀635-5240฀฀•฀FAX฀(201)฀635-5199
BPX/S10829฀•฀Flow฀16฀•฀Proof฀10฀•฀2/4/05฀•฀RUSH