Efforts by money management executives to revamp their firms' compensation policies are being complicated as a revival of optimism this year has outpaced the rebound in profits, according to a report released Oct. 19 by New York-based executive recruiting giant Russell Reynolds Associates.
Efforts by money management executives to revamp their firms’ compensation policies are being complicated as a revival of optimism this year has outpaced the rebound in profits, according to a report released Oct. 19 by New York-based executive recruiting giant Russell Reynolds Associates.
The “incredible bounce back” by markets came too late in the year to top up bonus pools, leaving executives with the delicate task of retaining key talent while tweaking compensation to better position their firms for long-term growth, said Cornelia Kiley, New York-based co-head of Russell Reynolds’ Asset and Wealth Management Practice in the Americas.
The report said bonus pools this year will vary greatly depending on factors such as investment performance and how quickly and deeply a firm trimmed its cost structure as markets were collapsing last year.
Firms with strong performance that responded decisively when markets fell could see only single-digit declines in their bonus pools, but those who stumbled or were slow to respond could see drops of between 20% and 35%, the report said.
“Executive teams face a communications challenge in managing the bonus expectations of professionals whose forward-looking optimism has outpaced the 2009 reality of reduced profitability,” the report said.
A continued market rally could ease that burden, but even executives at firms that emerged relatively unscathed from the turmoil appear convinced they will have to make significant changes in compensation, Ms. Kiley said.
Executives are asking whether “the behavior we’re incenting (sic) is not in line with the long-term profitability of the firm,” and what they can do to promote the health of their organizations, Ms. Kiley said.
“A greater percentage of compensation is being shifted to long-term deferred compensation, and bonus pools are being realigned with long-term profitability rather than quarterly market performance,” the report noted.
For example, in the same interview, Debra Brown, a senior member of Russell Reynolds’ Asset and Wealth Management Practice, said executives at some long-only firms could be moving to follow the lead of alternatives firms, deferring some of the payouts a manager would earn for a year of great performance as “money at risk,” to ensure whatever gains clients enjoyed could be sustained.
After a disappointing year in 2008, it could be especially hard to meet the expectations of managers who feel they’ve performed very well this year, particularly so if they achieved that performance despite the broader firm suffering through a bad year, Ms. Brown said. Deep personnel cuts this year have resulted in a smaller base to “fund” those top performers, the report said.
Russell Reynolds executives said recruitment activity is showing signs of picking up in recent months. “There was a big uptick in August,” Ms. Brown said, with institutional distribution a focus of those new hires.
Among other trends, more and more trustees, after being whipsawed by markets last year, are considering CIO outsourcing arrangements, and “a growing number of organizations are talking to us about getting into that business,” Ms. Brown said.
