What Comes After Record-Breaking Performance? A ‘Big, Fat Bonus’

The extended bull market and worries over retaining employees drive huge compensation increases.

Paul Yeung/Bloomberg

Paul Yeung/Bloomberg

With financial services having generated strong returns across the board — despite continued disruptions from Covid-19 — employees should expect big year-end bonuses. According to executive recruiters and a third-quarter report from Johnson Associates. a financial services compensation consulting firm, there will be significant year-end incentives across financial services, including asset management.

Employees in traditional asset management and alternatives are projected to earn big payouts this year. Although inflows into traditional asset classes were modest, the market was flush. According to the analysis, traditional asset management incentives will increase 12 to 18 percent from 2020; bonuses paid to hedge fund employees will grow 10 to 15 percent; and those at mid-size and large private equity firms will see bonus increases of 12 to 18 percent from last year. Johnson Associates’ analysis estimated incentives for the 2021 fiscal year.

In investment banking, Johnson Associates expects underwriters to earn bonuses 30 to 35 percent higher compared to 2020 incentives. In investment banking, Johnson expects a 20 to 25 percent jump in bonuses from last year.

“Almost everything is up, but investment banking is the hottest,” Alan Johnson, managing director of Johnson Associates, told Institutional Investor. “Asset management, private equity, and hedge funds are doing really well, but their business models don’t have the kind of spikes — the ups and downs — that investment banking does.” Higher bonuses in banking this year, compared to all asset management sectors, reflects the volatility.

Johnson attributed the bump in compensation to high market performance across all sectors in financial services. For instance, hedge fund performance sugred in the second quarter of 2021 with 82 percent of hedge funds delivering a positive annual return, II previously reported.

Endowments, like those at Washington University, Harvard University, Bowdoin College, the University of Pennsylvania, and the University of Chicago, saw record-breaking returns in the fiscal year 2021. Even pension funds fared well in the past year: While the institutions struggled during the 2020 Covid-19 pandemic lows, the aggregate funded status of public pension funds reached 80 percent in March 2021, II also previously reported.


“In the last year, the performance of endowments and foundations has been interstellar, out-of-the ballpark,” executive recruiter Charles Skorina told II. “Because of that, the bonuses the investment teams are getting are huge. Part of their compensation is based on the performance of the institution.”

In a normal year, Skorina said, a chief investment officer at an endowment or a foundation might make, for example, a million dollars. But, this year, their total compensation could round out to more like $1.5 million.

“The total comp this year is extraordinary,” Skorina said. “It’s way out of the normal range.”

Johnson also linked the work-from-home trend to the pay increase for financial services employees. In short, institutions don’t want employees to leave, so they’re paying them more. Companies are struggling to adjust to the hybrid and remote work environment, which, in turn, poses retention concerns for institutions. For instance, the normalization of video calls makes interviewing more accessible, creating an “environment ripe for leaving,” Johnson said.

“All of my clients are worried about retention,” he said. “As bonuses get paid over the next few months [in December, January, and February], our clients are very concerned that turnover will go even higher.”

From Skorina’s vantage point as an executive recruiter, the base salaries for financial services employees haven’t shifted significantly, but the magnanimous bonuses have changed the compensation expectations of investment talent. In turn, while the current compensation environment is good for that talent, it poses challenges in recruiting for C-suite positions.

“I have a couple of searches where there’s a target range for what my clients want to pay,” Skorina said. “I had somebody on Friday say to me ‘last year, this is what I was making, and that compensation figure you mentioned, Charles, would’ve been attractive. But, this year, I’m going to make 30 percent over that because of my big, fat bonus. So I don’t think I’ll take that job. Thank you.’”

This varies across institution types, Skorina said. For instance, family offices may be a bit reluctant to cave to talent’s newfound compensation expectations. But largely, conceding to a potential employee’s demands is easier and quicker than it would be at, for example, an endowment. For institutions like endowments and foundations, it’s not so simple.

“A family office is one thing. You can go to the rich founder and say ‘we’re going to have to table.’ He takes ten seconds and says ‘OK,’ or ‘not OK,’ or ‘let’s go lower,’” Skorina said. “But in an endowment or foundation, where there’s a bureaucracy and budgets, [a compensation increase] could take a year.”

Both Skorina and Johnson expect compensation to remain on the rise through 2022. As for how it all ends, Johnson said it’s inevitable but depends on the fiscal and political environments of the following years.

“It will peter out,” Johnson said. “It just depends when.”

Skorina agreed: “It will continue,” he said. “I doubt the Fed will disrupt it until the next [presidential] election.”