Asset management compensation

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January 2014

Those trying to attract top talent to Europe’s asset management firms are running into new hurdles.

The regulatory and public opinion ripple effects of the financial crisis are curtailing some bonus structures and encouraging more deferred compensation to reduce investment risk-taking. This makes hiring senior talent very costly, as the best candidates want to recoup the unvested deferred pay they leave behind when changing companies. Asset managers must leverage other aspects of their firm to attract talent, hire intelligently to minimise the expensive risk of each new hire, and put more focus on development and retention.

Years have passed since the height of the financial crisis, yet it still reverberates throughout the financial services industry. Increased regulation of compensation practices—along with public scrutiny and some backlash—have cast a shadow, even in sectors such as asset management that were tangential to the crisis.

Korn Ferry’s European Asset Management Practice recently surveyed managing directors and directors of institutional sales at asset management firms in the UK and Europe about compensation trends and their impact on hiring. The responses indicate that dislodging top talent from competitors and attracting it to a new organisation is becoming a more complex, laborious and costly undertaking.

Our key observations include: •

More than 85 percent of those surveyed said total compensation has remained flat or has gone down over the last three years in Europe’s asset management industry. A similar percentage—86 percent— believe that this trend is not going to change in the future.

•

Regulatory requirements and political pressures are altering the compensation environment.

•

As the proportion of deferred compensation increases, so does the cost of acquiring talent, because the best candidates will want to recover payments that have not vested.

•

Asset managers are changing the ways in which they compensate employees and will continue to effect change in compensation culture.

•

Asset managers will need to pay greater attention to improving their employer brand, and rely less on compensation, as a means of competing for talent.

The results of the survey point to a number of trends—some stemming from external pressures, others expressing internal forces—that will shape compensation practices for years to come.

Internal factors: perception vs. reality An overwhelming share—85 percent—of those surveyed said compensation levels in the industry were flat or had declined over the last three years.

Looking ahead, the outlook of the respondents is consistent: some 86 percent projected that the next three years of compensation will be, at best, flat— with nearly 50 percent projecting a decrease (see Figure 1). Only 14 percent of respondents believe total compensation will be higher in the coming years.

Figure 1 Over the past three years, how has total compensation changed in institutional sales in asset management?

Higher!

14%!

Lower!

28%!

Flat!

58%!

Figure 2 How will total compensation change in future years in institutional sales in asset management?

Increase slightly 14%

Decrease dramatically 7%

Decrease slightly 40% Flat 39%

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A very different picture emerged when respondents were asked about their own compensation (see Figure 3). In reality, some 45 percent have seen an increase in total compensation personally over the past three years. The majority of those seeing an increase were based in Germany, the Benelux and the Nordic nations, where strong recruitment activity, especially for institutional sales roles, appeared to have raised the general level of compensation.

Figure 3 Over the past three years, how has your own total compensation changed?

Lower 21%

Higher 45%

Flat 34%

This disconnect in perception between own pay and industry compensation levels has important implications for those responsible for hiring executives in asset management companies. Because a large population believe that their own remuneration exceeds the industry standard, attracting and dislocating that talent is more difficult, particularly in northern Europe.

Although compensation has never been the sole motivator for changing employers, in such a recruiting environment, factors beyond compensation become even more crucial to attracting top talent.

There used to be more flexibility available when structuring financial packages to secure the best candidates. According to survey respondents, the top two components used to create a compelling compensation package were, historically, guaranteed bonuses (52 percent) and high cash bonuses (44 percent). Today, the centre of gravity has shifted (see Figure 4). The most commonly cited element of compensation is the long-term incentive plan (39 percent).

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Figure 4 Which forms of compensation did you most commonly use to attract and secure new talent historically? And today?

Percentage of respondents

60% 50%

Historically

40%

Today

30% 20% 10% 0% Guaranteed bonus High cash bonus

High base salary

LTIP

External factors: Regulatory fallout from the financial crisis The fallout from the downturn continues to be felt in the form of regulatory and political pressures. These pressures act in tandem: regulators want to see compensation deferred over a longer period of time to discourage excessive risk-taking. Public opinion and politicians, meanwhile, want to reign in a culture of excessive compensation associated with the financial crisis.

Companies have altered the way they remunerate employees to fall in line with changing market conditions and new regulatory landscapes. While no industry standard has been set, many asset management companies have begun deferring a larger portion of compensation for three years. Indeed, nearly 50 percent of respondents across Europe said the portion of their bonus that is deferred had increased. This was felt most strongly in Switzerland, where 70 percent of respondents said they also had seen the vesting period lengthened.

Moreover, regulatory guidelines are getting more restrictive. In the UK for example, regulators are recommending that compensation be deferred over a five year period. So not only is a bigger portion of remuneration deferred, it is deferred for a longer period of time.

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That’s a costly multiplier effect for those recruiting senior executive talent.

The best candidates will demand to be compensated for what they are ‘leaving behind’—which now includes a greater proportion of their total pay package, which, in turn, is being accumulated over a greater number of years.

The challenge: De-risking the hiring process With the cost of acquiring talent at a premium, many asset managers are looking for ways to mitigate the risks associated with making senior hires.

Companies often hire people for their skills—but fire them for their ‘personality’. Therefore, one way to decrease the hiring risk is to take the full measure of potential candidates: their skill set; thinking, decision and leadership styles; cultural fit; dispositions and motivators; and their work experience. Taking steps to objectively assess all dimensions that contribute to success reduces the risks associated with new senior appointments.

At the same time, understanding what talent you have before you buy, and supporting the talent you’ve got once you’ve bought it, is now paramount.

Ensuring a successful appointment can be thought of in three key phases: Understand. It is imperative to have a full, objective picture of the individual’s disposition and leadership styles in addition to their skills and competencies. Previously, experience and technical skills were dominant factors when hiring executives, but this appears to be shifting. In our survey, 55 percent of respondents recognised that behavioural qualities are important for career progress and have an impact on compensation.

Support. There is significant evidence that formal, structured on-boarding programmes informed by the individual’s pre-hire assessment results reduce the “time to competence” of new hires and reduce the risk of derailment.

Develop. Retention becomes vitally important when the cost of hiring increases. Structured development plans are a key element in retaining high performers and high potentials.

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Conclusions Changes in the regulatory environment and political climate have altered how asset managers reward their employees, resulting in limits on guaranteed cash bonuses and other annual bonus-related structures. Those making senior hires are more restricted in how they structure compensation packages to attract talent, and the long-term incentive plan is becoming an increasingly important element of compensation packages for executives.

The good news is that compensation isn’t the only tool in the toolbox of those looking to hire. The quality of the brand, reputation of the team, and appeal of the work environment are all factors that have rising value in the talent market as compensation stagnates.

Still, despite a flat compensation market, talent acquisition costs are likely to rise because of the volume of deferred compensation. Companies will want to hire intelligently, and leverage on-boarding and development programmes to make sure they get the most out of each new executive.

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About the contributors Frank Hollmeyer is a Senior Client Partner in the EMEA Asset Management Practice, based in London. +44 20 7024 9087 frank.hollmeyer@kornferry.com

Alison Ashby is an Executive Search Associate in the EMEA Asset Management Practice, based in London. +44 20 7024 9000 alison.ashby@kornferry.com

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About The Korn/Ferry Institute The Korn/Ferry Institute generates forward-thinking research and viewpoints that illuminate how talent advances business strategy. Since its founding in 2008, the institute has published scores of articles, studies and books that explore global best practices in organizational leadership and human capital development.

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Visit www.kornferry.com for more information on Korn Ferry, and www.kornferryinstitute.com for thought leadership, intellectual property and research.

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