Fund Manager Pay On The Up
Wednesday, February 02, 2011

Pay as a percentage of net revenues has increased by 4% over the last financial year across all asset management firms surveyed in PwC’s annual asset management report, published January 31.

The study covering 22 well recognised asset management firms by PwC in the UK concludes that signs of improved fund performance have put pressure on asset management firms to invest in recruitment and retention ahead of true recovery in bottom line financials.

At the same time annual bonus spend as a percentage of pre-bonus operating profit has risen substantially, the survey shows, with increases of 9% for a typical firm and as much as 20% for some. These increases reflect a fall in profits from 2008 to 2009, which were experienced by two thirds (63%) of participants, combined with an increase in annual bonus payouts.

Tim Wright, remuneration director at PwC, commented: “After salary freezes in many firms over the last few years, asset management companies have been under pressure to correct seemingly suppressed pay levels to avoid losing talent as the recruitment market picks up. This investment comes at the expense of immediate shareholder return but firms clearly believe it will pay-off in the longer term.”

The report highlights that compensation costs are also being driven by pressure to increase base salaries. This reflects changes in the banking sector where bonuses have been scaled back to discourage excessive risk. Yet 40% of asset management firms actually increased bonus pools last year and only a third reduced their bonus spend, PwC said.

Wright added: “Despite many firms spending more than the previous year on bonuses, base salaries are still being negotiated up. Ultimately asset management and banking share much of the same talent pool and new hires expect base salaries to be aligned. This in turn is pushing existing employees to demand pay hikes as they notice market rates have increased. Pressure on base pay also suggests that while bonuses may have risen for many individuals, they are perhaps valued less now that many individuals have experienced reductions in bonuses in the past few years following a period of regular increases.

Indeed more than 50% of firms surveyed changed their deferred bonus policy from 2009 to 2010. The most frequently cited changes were the introduction of bonus deferral; increasing the group of employees to whom deferral applies; and increasing the amount of bonus deferred. Where deferral arrangements exist there has also been a shift away from deferred cash to deferral into shares and funds, reflecting the desire to align reward to business performance.

Around half of survey participants have also made changes to the use of long-term incentives, with a significant shift towards basing these on multiple performance conditions rather than a single performance measure. Of those firms using long-term incentives, 24% used a single performance measure in 2010 compared with 49% in 2009. Likewise, the use of multiple measures has increased from 4% in 2009 to 28% in 2010.

Wright continued: “Multiple measures have the advantage of incentivising achievement across a number of performance areas, while smoothing the levels of payout by reducing the probability of the award either not paying out at all or paying out in full.”

The report also looks specifically at compensation for CEOs of asset management firms. At this level total salary inflation over the last two years of 12% has exceeded both growth in the retail price index (RPI) and FTSE All-share index. However, total compensation including bonuses and long-term incentives has closely tracked the FTSE AllShare, not yet recovering from 2007 levels.

Wright concluded: “The close alignment of total CEO pay to the financial markets may provide some reassurance to shareholders. However, pressure on base salaries at all levels is set to become more intense following the FSA’s Remuneration Code, which restricts bonus payments further in banks and applies to all but the smallest of these. Firms face the challenges of preserving return to shareholders in the face of rising fixed pay costs, and managing bonus pools when other elements of pay are becoming more costly.”