As the year draws to a close, investment managers and allocators have begun to turn their attention to the annual questions of compensation and hiring talent. This time of year is traditionally ripe for turnover, and 2021 has not been an exception.
“We’re in a heightened turnover environment,” said Tyler Cloherty, managing director at New York-based strategic consulting firm Casey Quirk, which is part of Deloitte. “Most firms pay the bulk of their incentive-based compensation in Q4 and the beginning of Q1, so the potential [for] higher turnover [after people reap their bonuses] is certainly there.”
According to the Bureau of Labor and Statistics, the turnover rate in the “financial activities” industry has risen steadily over the last half decade, from 26.8 percent in 2016 to 31.3 percent in 2020. Cloherty told Institutional Investor that while the data for 2021 has not been released, the investment management industry has seen “incredible talent turnover” over the past year, although he cautioned that similar increases have been reported in a long list of industries. The turnover is most likely due to the Covid-19 pandemic and the subsequent “great resignation” movement, which began in April 2021 and has continued into the end of the year.
Brad Benn, who serves as a co-leader of Russell Reynolds Associates’ diversity, equity, and inclusion sector in the Americas, agreed, although he added that the high turnover rate may also be a result of pent-up demand left over from 2020. Due to pandemic-induced uncertainty and volatility, he explained, many companies and firms were hesitant to lose their top executives to “natural turnover” events such as retirement, and many executive leaders opted to stay in their positions so as not to leave firms high and dry in the midst of a crisis.
“Now, in 2021, we’ve started to come out of that, and we’re seeing a multiplier effect,” Benn told II. “You’re seeing the natural turnover that one might see on an annual basis, [along with] some of the pent-up demand that didn’t happen in 2020.”
Benn also said he felt that the pandemic prompted some existential questions on the part of both employees and employers. During a period of such dramatic global change and uncertainty, people began to reevaluate their career and life goals, while often simultaneously questioning the intentions and values of the companies they worked for. Employers, on the other hand, used the same uncertainty to examine the strength and weaknesses of their executives, which often resulted in a resetting of leadership expectations.
“It’s easier to sail with the wind at your back,” Benn said. “But when the seas get really rough, like they did last year, do you have the right leaders in the right seats? [In other words], how are these people operating in times of crisis? A lot of companies have come to us and said, for example, ‘We thought we had a great CFO, but we’ve been quite disappointed.’”
Cloherty said that firms have begun to address the issue of turnover in a number of ways. Some have turned to more traditional incentive packages, such as those that offer an employee a combination of work-location flexibility and higher compensation. Others have begun to take a look at long-term compensation structures, in which the incentives promised to a new hire are spread out over a longer period of time, as a way to ensure that the employee has a good reason not to leave the company.
“The concept of a long-term performance structure or a long-term incentive plan is becoming more popular,” Cloherty said. “Incentive packages are becoming longer, to try to make sure that employees [have an interest in maintaining] a longer tenure and [to help] firms pull people in.” Whatever tactics a company may decide to use, however, he says it’s pretty clear that at the moment, it’s a better time to be an employee than an employer. “Given that there [are] more competitive salaries and flexibility, it’s certainly a market that’s tilted more toward the talent than toward the [recruiter].”
Within the asset-management industry itself, the long-standing competition for talent between asset managers and asset owners has also heated up. Many asset owners are barred from compensating employees at the competitive levels that other financial services firms are able to provide, and this has created a “gradient” between the top talent working for an asset owner and those employed in similar roles by an asset manager. “Asset owners have interesting and purposeful jobs, but their organizational background is profit-for-member, meaning any excess return goes to the members,” said Roger Urwin, the global head of investment content at Willis Towers Watson, in an interview with II. “Therefore, they’re run on terms that are less profit-focused and more [geared toward] carefully budgeted expenditure[s].”
Casey Quirk’s Cloherty agreed, but said that this has been the case for at least a decade. “Asset managers can pay more money than a state fund or any public institution that has oversight and is taxpayer-funded, [so it’s easier for them] to have higher comp and higher bonus structures.”
For his part, Urwin doesn’t expect this dynamic to change anytime soon. “Asset managers have grown to be a bigger part of the industry and have managed to secure really quite exceptional long-term profitability,” he said. “The margins in asset management are pretty high. While margins go to shareholders, they also go to support the share of compensation that the top talent gets in those organizations. It’s a good self-perpetuating opportunity for asset managers to secure very good talent.”
Benn, however, believes that the highly competitive talent environment could prompt asset managers and owners to open up their searches to a wider pool of candidates, a trend that could simultaneously increase the diversity of investment talent.
“It’s illustrative of a bigger paradigm shift,” he said. “People are really challenging the notion of the core skills and competencies that are necessary to be [in a specific] role.”