Goldman Sachs 2007 Annual Report Download - page 56

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Management’s Discussion and Analysis
Non-compensation expenses of $6.65 billion for 2006
increased 28% compared with 2005. Excluding non-
compensation expenses related to consolidated entities held for
investment purposes, non-compensation expenses were 24%
higher than 2005, primarily due to higher brokerage, clearing,
exchange and distribution fees in Equities and FICC, and
increased other expenses, primarily due to costs related to our
insurance business, which was acquired in 2006. In addition,
market development costs and professional fees were higher,
reflecting increased levels of business activity, and occupancy
expenses increased, primarily reflecting new office space and
higher facility expenses.
Provision for Taxes
The effective income tax rate was 34.1% for 2007, down from
34.5% for 2006, primarily due to changes in the geographic
mix of earnings. The effective income tax rate was 34.5% for
2006, up from 32.0% for 2005. The increase in the effective
income tax rate for 2006 compared with 2005 was primarily
related to a reduction in the impact of permanent benefits due to
higher levels of earnings in 2006 and audit settlements in 2005.
Our effective income tax rate can vary from period to period
depending on, among other factors, the geographic and
business mix of our earnings, the level of our pre-tax earnings,
the level of our tax credits and the effect of tax audits. Certain
of these and other factors, including our history of pre-tax
earnings, are taken into account in assessing our ability to realize
our net deferred tax assets. See Note 14 to the consolidated
financial statements for further information regarding our
provision for taxes.
2007 VERSUS 2006.
Operating expenses were $28.38 billion for
2007, 23% higher than 2006. Compensation and benefits
expenses of $20.19 billion increased 23% compared with
2006, reflecting increased discretionary compensation and
growth in employment levels. The ratio of compensation and
benefits to net revenues for 2007 was 43.9% compared with
43.7% for 2006. Employment levels increased 15% compared
with November 2006.
Non-compensation expenses of $8.19 billion for 2007
increased 23% compared with 2006, primarily attributable
to higher levels of business activity and continued geographic
expansion. One-half of this increase was attributable to
brokerage, clearing, exchange and distribution fees, principally
reflecting higher transaction volumes in Equities. Other
expenses, professional fees and communications and technology
expenses also increased, primarily due to higher levels of business
activity. Occupancy and depreciation and amortization
expenses included exit costs of $128 million related to the
firm’s office space.
2006 VERSUS 2005.
Operating expenses were $23.11 billion for
2006, 36% higher than 2005. Compensation and benefits
expenses of $16.46 billion increased 40% compared with
2005, primarily reflecting increased discretionary compensation
due to higher net revenues, and increased levels of employment.
The ratio of compensation and benefits to net revenues for 2006
was 43.7% compared with 46.6% for 2005. This lower ratio
primarily reflected our strong net revenues in 2006. Employment
levels increased 12% compared with November 2005.
In the first quarter of 2006, we adopted SFAS No. 123-R,
which requires that share-based awards granted to retirement-
eligible employees be expensed in the year of grant. In addition
to expensing current year awards, prior year awards must continue
to be amortized over the relevant service period. Therefore, our
compensation and benefits in 2006 included both amortization
of prior year share-based awards held by employees that were
retirement-eligible on the date of adoption of SFAS No. 123-R
and new awards granted to those employees.
Compensation and benefits expenses in 2006 included
$637 million in continued amortization of prior year awards
held by employees that were retirement-eligible on the date of
adoption of SFAS No. 123-R. This amount represents the majority
of the expense to be recognized with respect to these awards.
54 Goldman Sachs 2007 Annual Report