Goldman Sachs Group reportedly laid off 5% of its trading desk staff on Tuesday, as part of its annual review process, as first reported by Reuters.  There were layoffs in other divisions - and more are expected in coming weeks.  The goal is "meritocracy" which, in this case, means dropping the "worst-performing" 5% of Goldman's entire staff.  The sources didn't have an estimate on how many Goldman employees were or will be affected by these cuts.  At year-end, Goldman had 35,700 employees, suggesting that 1,785 will be let go in total, not factoring in new hires.

    What the Layoffs Mean.   The trading layoffs come at a sensitive time - with trading revenue weaker than had been expected.  Once source surmised the layoffs "might be a sign that poor revenues are forcing cost reductions in order to protect profits," adding that there were "limited job cuts on the trading floor" this week, but "I think more might be coming."

    Other Comments.   Analysts at Keefe, Bruyette and Woods warned earlier in the week that the nuclear disaster in Japan could impact trading desks as well.  It wasn't immediately clear whether firms other than Goldman had laid off employees or were planning staffing cuts.  Goldman's layoffs were not related to the dismantling of proprietary trading operations in recent months, as required by the financial reform bill.

    "SIX SIGMA" - The Review Process.   Goldman's practice of weeding out supposed poor performers involves an elaborate peer review process.  Employees are reviewed by supervisors, co-workers and employees they supervise "in a 360-degree review process," according to the company's annual report.  Poor performers are known internally as being on the "Z-List," according to the sources. Those employees typically get an early signal about their status with a disappointing bonus in January.  Many poor performers tend to quit ahead of layoffs and seek other jobs, the sources said. The rest are eventually let go.

The company's review process is legendary on Wall Street, according to Steven Gerbel, founder of Chicago Capital Management, a hedge fund that has used Goldman as a brokerage for several years. He likens it to the "Six Sigma" quality control process first established by Motorola.  [Reuters, 3/17]