Quantifying the extent to which careers at Goldman Sachs are a ponzi scheme

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People like to describe investment banks as ponzi schemes. Whenever we mention Barclays Investment Bank, for example, there is someone who likes to leave comments insisting - possibly unreasonably - that, 'Barclays Capital is run as a cashcow for the benefit of a few front office big boys.'

Similar charges could be levelled at most banks. Now that banks are compelled to reveal how much they pay their members of 'code staff' (significant risk takers, senior staff and others specified by the FSA), it's become apparent, for example, that there are around one hundred senior people working for Goldman, Citi and JPMorgan in London who earn in excess of £2m a year.

This week's coverage of Goldman's partnership pool has shed additional light on the structure at Goldman Sachs.

The Sunday Times reported at the weekend that Goldman has 483 partners, of whom 100 will be leaving soon. Goldman has denied that its partners are being compulsorily ejected and says they're merely retiring. The Financial Times says Goldman is likely to promote around 100 new partners this year.

At the end of last year, Goldman employed 33,000 people in total. The partnership pool therefore accounts for around 1.2% of its total headcount.

The Wall Street Journal suggests average pay per partner was around $4m last year. This suggests that Goldman's partners collectively earned $1.53bn for 2012 - or 13% of its total $12.2bn compensation pool.

Below the partners come the managing directors, of whom around 200 are promoted annually. Given that the average tenure of an MD is 12 years, we calculate that there are around 2,400 MDs at Goldman. Conservatively, we estimate that the average MD at the firm earns $2.5m - implying that another $6bn of the compensation pool flows to the bank's MDs.

If we're right, this means at least 63% of Goldman's compensation pool goes to the top 10% of its staff.

Below the MDs, Lloyd Blankfein himself says there are a massive 12,000 VPs. Therefore, the chance of progressing from VP to MD in any one year appears to be around 2%. Once you get to MD, you appear to have a 4% chance of being promoted to partner every year.

If 12,000 Goldman staff are VPs, 483 are partners and (we assume) around 2,400 are MDs, the remaining 18,000 must be analysts and associates.

Therefore, when you join Goldman as an analyst/associate, you have a 67% chance of making VP, a 2% chance of going from VP to MD and a 4% chance of going from MD to partner. For someone arriving in Goldman's analyst or associate pool, the chance of making it to partner level at the firm therefore seems to be around 0.05%.