Sustaining investment performance has become more important than ever to protect profitability, intensifying competition for experienced fund managers with strong track records. Our Asset Management Reward Survey 2011 ― which we researched in the late summer ― showed fierce competition for the best fund managers, pushing up remuneration. Just a few months later the mood in financial markets has darkened, but it seems likely that the more talented managers will still be fought over.
Entitled Paying a premium for the best investment professionals, our survey revealed that competition for talent led to significant remuneration increases in 2010/2011 financial year. Median base pay of chief investment officers rose by 20%, with total compensation up by 38%. This was far in advance of rises for other senior roles. For example, chief executive officer pay rose by 4% and total compensation by 13%.
Clearly, market conditions have deteriorated in the past few months, but the most experienced fund managers are likely to remain in demand because asset management firms are concentrating primarily on maintaining their assets under management in a low-growth environment. Although pay inflation pressures are abating, asset managers need to find additional ways to attract investment talent in what remains a highly competitive market for talent. We believe that ‘soft’ measures such as the firm’s culture are increasingly important, and that asset managers have an opportunity to recruit talented investment staff from related sectors shaken by today’s volatile markets.
The quantitative data in our sixth annual survey of pay in European asset management showed compensation levels rising in 2010/2011 for the second successive year, although survey interviews suggested that pressure on pay was weakening. Asset managers’ total compensation spend rose by 18%, and was supported by rising revenues and profitability. So cost ratios remained stable over the 12 months, and in some cases fell a little.
In total, 25 firms from across Europe took part in the study, contributing both data and their insights. Representing a range of different geographies, investment strategies and size of firms, they gave a rich picture of current trends. And, in almost all firms surveyed, remuneration reflected fund managers’ status as the most sought-after employees – a change on some previous years when, for example, risk managers were in most demand.
Following two years of market recovery from the 2008 financial crisis, rising asset manager profitability fed through to remuneration in 2011. High remuneration increases for investment staff happened within a context of general pay rises across asset management firms, slightly in advance of inflation, alongside big bonuses. Survey respondents reported base salary levels across all employees rose by an average of 4% in aggregate. This broad average masked considerable variations, depending on ability, role and geography. Bonus pools were 30% higher on average, lifting total compensation costs by an average of 18%. (At the end of 2011, a snapshot survey showed that half of firms expected that bonuses to be paid in early 2012 would be lower than the previous year, while a third thought they would be higher, and the balance expected no change.)
“The market for talented individuals is incredibly tight, not just for fund managers but for senior people generally,” noted one head of HR, interviewed for our survey. “Some of the numbers in terms of deferred compensation are very off-putting. If you focus on global or emerging markets, there are not many people with attractive track records, partly because of length of time in the market, but also companies are becoming much cuter in terms of the retention they put in place. We have been looking at a number of people recently and the base line now is about £500,000 of lock-in.”
Competition for staff was particularly fierce in Asia, where many asset managers are looking to grow their businesses. Across the board, the median base salary rise averaged over 7%. Geographies such as Brazil and India also saw high salary rises, as did product areas including exchange-traded funds, global emerging markets and global equities.
With fund managers remaining key to maintaining investment performance, we believe that asset management firms have an opportunity to exploit the difficulties of related financial sectors to recruit talented, seasoned investment professionals. Furthermore, asset managers should resist pressure on base pay and focus on making a strong firm culture a way of recruiting.
Our survey also showed that new regulation, in the form of the Capital Requirements Directive (CRD) III regulatory framework, was beginning to restrict asset managers’ ability to compete for staff in international markets. While it is less restrictive than originally feared in the UK, just a few months after the Directive was fully implemented, asset managers were experiencing practical difficulties when bidding for talented fund managers, sales people and other staff.
In total, 85% of those interviewed said they were concerned that the new rules would harm their global competitiveness. In particular, asset management organisations reported difficulties competing for investment professionals in hot markets.
Several UK-based respondents to our survey stated that their inability to offer guaranteed bonuses for more than one year was impeding their attempts to hire talented investment staff. A number reported difficulties bidding for staff against rival firms based in Asia, the US and Switzerland.
In some continental European countries respondents reported that the problem was even more severe, especially where asset managers have to defer large percentages of bonuses for several years.
Under CRD III, European Union countries have recently become the first to implement national regulations designed to reduce incentives for financial services professionals to take risk. As a result, Europe’s asset managers have less freedom over how they pay bonuses than those based elsewhere.
Even within Europe different countries offer varying degrees of flexibility. The UK’s Financial Services Authority has moderated the pay rules intended primarily for banks, in its Remuneration Code, granting most asset management firms ‘Tier 4’ status under its ‘proportionality’ approach.
Some other European regulators have made asset managers subject to the same rules as banks, while others have not applied CRD III to them at all.
While global regulators are trying to introduce a level playing field, in reality this will not happen globally or even within Europe. Asset managers should treat the new regulations seriously ― not just as a compliance exercise ― seeking to mitigate their challenges while also taking advantage of their opportunities. Doing so may require introducing flexibility into your compensation model, region by region.
Asset managers have taken the line of least resistance when adapting to changing regulatory and commercial practice. Few have made wholesale changes to compensation models, but most have introduced measures to comply with CRD III regulation, and some are looking to modify the ways they incentivise investment professionals.
Survey respondents told us they were introducing a range of measures in reaction to the CRD III measures, aiming to match reward to long-term performance, adjusted for risk. Some had deferred bonuses over longer periods of time, while a minority had introduced clawbacks, and others explicitly considered risk when setting bonuses.
In total, over 70% of survey respondents had changed the basis of variable remuneration to reflect one or more of these factors. At the same time, a number of asset managers were seeking to change the way they calculated investment professionals’ incentive funding, by tying it to fund, or desk, performance rather than the company’s overall profitability. Firms were doing this in order to link investment professionals’ reward more directly to their performance, so that they did not receive low rewards in years when they had performed well but the overall corporate bonus pool might be low.
The degree to which such changes prove to be a positive move will depend to a large extent on the culture of the organisation. For businesses where corporate results are essentially the aggregation of the results for a number of sub-businesses operating with a degree of autonomy, tying fund manager reward to the financial performance of their own product range can engender strong behaviours around both revenue growth and cost control. But for a firm that promotes group-wide investment processes, or looks to nurture an ethos of teamwork and cross-working, such a move could prove detrimental through encouraging silo behaviours.
As new regulations and high amounts of locked-in compensation make it more difficult to recruit staff, long-term talent strategies that include a broad range of incentives are becoming more important. You should seek to maximise your ability to develop talent internally and to tie in valuable staff with financial and other incentives.
You should also examine your model for compensating staff in international markets, analysing how you can compete for talented individuals in markets such as Asia and the US. Uneven introductions of new regulations globally mean that global compensation policies have to be adapted to different markets. With tax rates changing in many countries and flexibility being limited, you should examine the tax efficiency of remuneration. In some cases, it might be worth analysing your business structure and considering whether some degree of corporate restructure would give you an advantage over others, when attracting and retaining staff.
In summary, the financial market environment might have taken a sudden turn for the worse, but the best investment professionals remain in demand. You can take advantage of weakness in other financial sectors to attract seasoned professionals. Looking to the future, though, you should concentrate on using a strong culture to tie in staff – not just high remuneration.
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