In the second half of 2021, financial services employees, including private equity and hedge funds, should expect “meaningful” year-end incentive compensation, according to a new report from Johnson Associates, a compensation consulting firm.
For all business segments, including asset management, investment and commercial banks, private equity, and hedge funds, incentives have been trending upward since 2020.
“After being down dramatically earlier in the year, it looks like pay is going to be up nicely this year — double digits for some people,” Alan Johnson, managing director at Johnson Associates, told Institutional Investor. “I think that’s a pleasant surprise because it was somewhat unexpected.”
After evaluating performance for the first half of 2021, the compensation consultant forecast that annual incentives for the entire year would be 5 percent higher than what the firm had anticipated in 2020. The report attributed the unexpected surge to market appreciation upping assets under management and the increased money that investors socked away in fixed income and multi-asset strategies.
“It’s a nice uptick for an industry that was under a lot of fee compression,” and has been facing other long-term challenges, Johnson said.
In the first half of the year, alternatives carried the asset management industry. In fact, private equity funds saw a five-percentage-point increase in projected 2021 incentive funding from 2020 expectations. The PE sector saw massive upticks in fundraising and realizations, which ultimately led to the increase in compensation, according to the report.
“In asset management, the stars are the alternatives,” Johnson said. “Particularly, private equity is the queen of the ball.”
Hedge funds also saw a five-percentage-point increase from 2020 incentive expectations, a movement Johnson connected to positive flows paired with strong performance in the sector.
In investment banking, advisory and underwriting positions also saw a five-percentage-point increase in incentive expectations in the first half of 2021. The report attributes the increase to a hot initial public offering market, which boosted underwriting activity, heightened M&A activity as interest rates remained low, and accelerated deal making.
“These are areas that were up last year but are going to be up even more dramatically this year,” Johnson said. “It’s the best year probably in a decade in terms of that business.”
Johnson said the end-of-year compensation boosts will garner a “so-so” reaction from employees in the mentioned sectors: “I think the people in the industry will feel the pay increases are nice, but with all the stress and work and disruption that’s going on, I think people will feel just OK.”
For junior talent, Johnson said the comp increases may not be enough to keep them in the business after a year of minimal recruiting, decreased retention, and complaints of feeling overworked.