Opalesque Industry Update - Compensation in the asset management industry is rebounding after two difficult years. The significant levels of asset depreciation and investor redemptions that persisted into 2009 have given way and U.S. investment management firms are showing signs of recovery in both overall company performance and compensation levels. Greenwich Associates and Johnson Associates, a New York-based compensation consulting firm, collaborated on a review of the relevant benchmark changes in asset management compensation amounts and structures from the start of the global market crisis through the remainder of 2010. |
Although the global market crisis reduced average compensation levels throughout the asset management industry, investment professionals at hedge funds experienced by far the largest declines.
· Compensation figures reported by study participants show that as markets imploded in 2007–2008, average total compensation for senior hedge fund fixed-income investment professionals declined more than 40%, only to rebound by about the same amount from 2008–2009. At $1.1 million, projected 2010 average total compensation for senior fixed-income professionals at hedge funds exceeds pre-crisis levels.
· Average reported compensation for senior hedge fund equity professionals declined 44% from 2007–2008 and then fell another 15% from 2008–2009. Total compensation for these professionals is projected to increase by 8% in 2010 to $875,000.
“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,” says Greenwich Associates’ Director of Institutional Marketing Jennifer Litwin.
Traditional Management Firms
Equity and fixed-income professionals at traditional asset management firms have experienced far less volatility in compensation levels.
· Average compensation levels among senior fixed-income professionals at traditional funds and advisors declined by about 5% from 2007–2008 and then jumped 53% from 2008–2009. Those levels are projected to increase approximately 10% to $525,000 in 2010.
· Average compensation among senior equity professionals at traditional funds and advisors actually increased 34% from 2007–2008 and then held steady from 2008–2009. These levels are projected to increase 12% to $950,000 in 2010.
Softening Expectations for 2010
As demonstrated by the figures above, moderate improvement in the business environment and year-on-year growth in AUM is expected to push compensation levels higher across the investment management industry. “While the rebound in average compensation levels in this industry has been impressively fast, projections for 2010 are softer now than they were just three-to-four months ago,” says Johnson Associates’ Managing Director Francine McKenzie. “Uncertainty about market direction, the strength of the global recovery and near-term prospects for asset management growth and profitability is dampening expectations that earlier in the year were quite strong.”
Pay Differential by Job Title
The expanding influence of the Chief Investment Officer (CIO) position within many asset management organizations is reflected in the growing disparity in total compensation between CIOs and other investment professionals. Average 2009 total compensation for CIOs in equities was approximately $1.80 million, compared to $825,000 for equity portfolio managers, $540,000 for directors of research and $320,000 for analysts. In fixed income, CIOs earned approximately $850,000 on average compared to a range of $340,000–$525,000 for other investment professionals.
Mix of Pay (Cash Compensation)
In 2009, bonuses accounted for approximately 70% of cash compensation among equity portfolio managers and 50-60% among equity analysts and traders, with the remainder salary. For fixed-income portfolio managers, salary makes up a bigger portion of cash compensation. Bonuses for fixed-income investment professionals ranged from approximately 65% for traders and 55% for portfolio managers to roughly 25% for analysts.
Although most asset management organizations are moving in line with other financial service companies by altering compensation structures in favor of long-term incentives, these changes have yet to be reflected in the actual compensation packages reported by asset management professionals. Outside of senior positions such as CIO, cash salary and bonus continue to be perceived as the most significant portion of asset management compensation. Beyond 2010, the consultants at Greenwich Associates and Johnson Associates project a significant expansion in the use of deferred/long-term incentives by asset management firms. This growth will in all likelihood come at the expense of bonuses, which are expected to decline as a share of overall compensation while both deferred/long-term compensation and cash compensation increase.