The Delicate Balance of Paying Asset Managers

Investment management firms need to weigh employee motivation against prudent business when determining compensation packages.

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In a meeting last fall, the CEO, CIO and head of human resources at a large investment firm argued over whether to raise compensation and bonus pools based on the firm’s ability to pay, or to steward those assets more conservatively. The CIO recounted the pressure he was getting from investment professionals about an across-the-board pay raise, while the head of HR countered that the firm was still at record low turnover, particularly at the more senior levels in portfolio management and sales, and had been successful recruiting over the past two years. The CEO was unwilling to settle the dispute as the meeting drew to a close. This debate struck me as the backbone of a compensation and recruiting challenge that many firms simply gloss over.

There is always a delicate balance in corporate governance between employee motivation and the conservative stewardship of assets, and the investment management business is no exception. Historically, spendthrift compensation payouts are frowned upon, as are penny-pinching companies that let employee dissatisfaction lead to excess turnover. In many ways 2014 was a watershed year for asset managers around the world as a majority experienced climbing profitability on the back of several years of rising, if perhaps appropriately skittish, markets. Results point to significantly higher compensation payouts across the industry, without a strong motivating factor, such as increased turnover or challenging new recruiting goals.

Asset management firms are anxious to reward hard-working and loyal employees, and there is no question that in many cases nonexempt and lower-level managers have seen total compensation relative to inflation rise only marginally since the 2008–’09 recession. Even more-senior professionals with equity stakes in traditional (not alternative) asset management have in many cases experienced a lost decade, as cash and equity compensation packages are only now returning to the cumulative values seen in the mid-2000s. Since 2012 this tendency has persisted in the face of rising firm profitability and record markets. Not surprisingly, employee expectations are running high.

Certain key roles, such as top-performing portfolio managers and leading sales executives, that often have compensation programs heavily weighted to equity or revenue-sharing arrangements, experienced significantly better total remuneration for 2014 based on strong firm profitability. This trend repeats the pattern observed at year-end 2013 and remains a dominant feature of compensation for the most senior professionals in the investment business.

However, at more than half the firms in the II300 ranking of the U.S.’s 300 largest asset managers, increasing profitability is based mostly on the rise of market valuations to record highs rather than on the organic growth of client businesses. This lack of organic growth has led to caution among C-suite executives, and my anecdotal experience suggests that this is true globally. When it comes to hiring, asset managers are showing restraint, avoiding longer guarantees and generous contracts, and giving extra care to the continuity and values of corporate culture represented by longer-term, loyal employees.

Total turnover at most firms I visited in late 2014 was running at 10 to 12 percent — and around 5 percent among exempt employees and senior managers. This level of turnover represents a continuing low point for the asset management industry since the 1980s.

It is surprising that asset managers continue to boost pay across the board in the face of such low turnover. One would expect a more aggressive stewardship of corporate assets through compensation inflation restraint.

I believe that a more appropriate course of action would include raising compensation using steeper differentiation curves among employees based on performance. This would include rewarding top performers with significantly larger increases than median or poor performers. In this manner, more-valuable employees would be experiencing rewards of sharing profits already enjoyed by some C-suite executives. Such a “feel good” reward would be beneficial in building the trust and loyalty of these key performers, in advance of more-competitive markets in the future.

The savings of holding back compensation increases for median performers could be significant, both in stewarding resources more cautiously in the likely event of future difficulties as well as allowing future increases to have a bigger impact. The downside of this strategy is negligible, as median and poor performers usually have far fewer career alternatives and unforced turnover among them is generally much lower than with top performers. • •

George Wilbanks built the asset and wealth management practice at executive recruiting firm Russell Reynolds Associates before founding Stamford, Connecticut–based Wilbanks Partners in 2011.