Asset managers' pay: Smaller bonuses, bigger salaries — and more deferred comp

The financial services industry is walking the compensation tightrope between paying big for the best talent and navigating around criticism of exorbitant pay scales. According to the latest research from Greenwich Associates and Johnson Associates, compensation levels in the asset management industry are on the rise after falling during the economic downturn. But there are likely to be many more ways of dishing out the pay, with less emphasis on large year-end bonuses. “Back in the day, it was not uncommon to see cash bonuses making up the bulk of somebody's income, but now we're seeing greater diversity with higher salaries, lower bonuses and a lot of other incentives,” said Kevin Kozlowski, an equities product manager at Greenwich. The research, which studied changes in asset management compensation amounts and structures from the start of the global market crisis in 2007 and through forecasts for the remainder of 2010, found that fixed-income hedge fund managers have gained the most ground. At $1.1 million, the projected average total annual compensation for senior hedge fund fixed-income investment professionals has exceeded pre-crisis levels, which saw incomes initially decline by 40%. Compensation levels were measured across fixed-income and equity categories in both traditional and alternative-asset-management industries. And the study found that incomes across the board took major hits after the onset of the crisis in 2007 and 2008. Beyond that point, the various categories began to diverge in terms of compensation rebounds. On the equity side of the hedge fund space, where average compensation in 2010 is expected to be $875,000, the average fell by 44% in the year after the crisis hit. The average compensation fell by another 15% in 2009. “Hedge fund equity professionals in 2010 are earning about half what they took home in the boom days of 2007, and less than their counterparts at traditional asset management organizations,” said Jennifer Litwin, director of institutional marketing at Greenwich. Equity and fixed-income managers at traditional firms saw less compensation volatility over the past few years. On the fixed-income side, investment professionals saw their incomes decline by about 5% from 2007 to 2008, and then increase by 53% from 2008 to 2009, according to the research. This year, traditional fixed-income investment professionals are expected to average $525,000, a 10% increase from last year. Equity investment professionals actually saw their compensation increase 34% from 2007 to 2008, and that level held steady through 2009. This year, compensation levels are expected to increase by 12%, with average annual income at $950,000. “Despite what we've been through, the asset managers are doing better than expected,” Ms. Litwin said. “The fact is you need to pay to keep your talent.” While companies realize the need to pay for the best and brightest talent, they are also increasingly subjected to the wrath of critics who condemn financial industry pay scales that are in stark contrast to the income if the average American household — particularly at a time when unemployment is hovering near 10%. This is leading to a more diverse compensation model, according to the research. “There have always been different pieces of the [compensation] puzzle, but we're seeing different weightings now,” said Ms. Litwin. In 2009, for example, bonuses accounted for approximately 70% of cash compensation among equity portfolio managers and more than 50% among equity analysts and traders, with the remainder coming in the form of salary. But the research found that for 2010 and beyond, asset managers are more likely to be paid with longer-term incentives and forms of deferred compensation designed to align the interests of the investment professional more closely with that of the firm. The growth in the use of deferred and long-term incentives, the researchers concluded, will likely come at the expense of bonuses, which are expected to continue to decline as a share of overall compensation.