The investment bank and asset manager said fourth-quarter earnings nearly tripled as it set aside less of its revenue for pay and earned more from trading. For the full year, employees were paid just 37.9 percent of the bank's revenue, the second-lowest proportion since Goldman went public in 1999.
"We don't look to overpay anybody," said Harvey Schwartz, a Goldman Sachs trading executive who will become the bank's chief financial officer at the end of this month.
Even if a smaller share of revenue went to employees, Goldman Sachs managed to increase average employee pay last year because it laid off staff and took in more revenue. In other words, the bank's remaining employees were more productive, but much of the benefit went to shareholders.
Analysts said other banks are likely to feel pressure to keep their compensation expenses in check after Goldman's results. But for Morgan Stanley , the second-biggest stand-alone U.S. investment bank, paying out a lower percentage of its revenue to employees could be tough because analysts believe its revenue fell last year.
Goldman missed the worst pitfalls of the financial crisis but has suffered public relations embarrassments from trades it executed during the crisis and from executives' comments afterward. The bank is struggling to figure out how to navigate the post-crisis world, in which clients trade less and regulations and capital rules crimp profits in many businesses.
LAYOFFS, PAY CUTS
With many banks facing the same problems, analysts expect layoffs across Wall Street. Morgan Stanley plans 1,600 job cuts in 2013, while Goldman cut 900 jobs in 2012, equal to about 3 percent of its work force.
But laying staff off will not be enough, and employee pay will likely fall too, analysts said. Brad Hintz, a former Morgan Stanley treasurer who is now an analyst at Bernstein Research, estimates that across Wall Street average pay in trading businesses could fall 20 percent.
"There's only one way to get returns up on Wall Street, and that's to cut the compensation of the employees," Hintz said.
Investors have been pressuring banks to pay less of their revenue to employees. In 2011, investors pressed Morgan Stanley executives to pay somewhere closer to 30 percent of the bank's revenue to employees, instead of around 50 percent, according to one person at those meetings.
Goldman posted fourth-quarter earnings of $2.8 billion, or $5.60 per share, up from $978 million, or $1.84 per share, in the same period a year ago.
Analysts' average earnings forecast was $3.78 per share, according to Thomson Reuters I/B/E/S.
RETURN ON EQUITY RISES
Setting aside less money for pay helped Goldman post a return on equity of 16.5 percent for the fourth quarter on an annualized basis, the highest level in almost three years. The figure is closely watched by investors as a measure of how well the company is wringing profit from shareholders' equity.
In the fourth quarter of 2011, the annualized return on equity was 5.8 percent, but before the crisis that figure often topped 30 percent.
On a conference call, Goldman's Schwartz said that what put the bank in a position to boost its return on equity "were the steps we took over the last two years in terms of managing expenses and being quite disciplined."
Goldman shares rose $5.50 or 4 percent to $141.09.
Graphic: Goldman earnings
Graphic: Goldman revenue, compensation
A significant part of Goldman's earnings boom came from improvements in market values in the stock and bond markets, as well as increased activity from clients.
The bank said it took in "significantly higher" revenues from credit products and mortgages in its bond-trading business. Its investing and lending division, which earns money mostly from higher values on Goldman's stock and bond investments, reported nearly $2 billion worth of revenue in the fourth quarter, compared with $872 million a year earlier.
But gains were broad, with revenue up across each of Goldman's business lines, from investment banking to investment management. Overall, revenue jumped 53 percent to $9.2 billion.
The bank said compensation expense, typically the biggest cost for Wall Street firms, fell 11 percent in the fourth quarter from a year earlier. The expense was just 21 percent of net revenue, roughly half of what the firm usually pays out to employees.
For the full year, the bank paid employees just 37.9 percent of revenue, the lowest percentage since 2009's 35.8 percent. That year was a record for earnings, but for the last five years the figure has averaged closer to 42 percent. In 2011, the figure was 42.4 percent.
On average, Goldman employees earned $399,506 apiece in 2012, up from $367,057 in 2011.
Separately, the bank agreed to pay $330 million in cash and other assistance to troubled mortgage borrowers to end a case-by-case review of foreclosures required by regulators. The settlement stems from the Litton Loan Servicing business that Goldman bought in 2007 and sold in 2011.
Other big banks reporting results on Wednesday were JPMorgan Chase & Co and BNY Mellon Corp . Both firms reported an increase in earnings.
(Reporting by Lauren Tara LaCapra; Editing by Gerald E. McCormick, Chizu Nomiyama, John Wallace and Phil Berlowitz)