Equity awards came to forefront during market uncertainty
Attracting and retaining top-tier employees at asset management firms has proven a formidable challenge amid a lackluster economy over the past 18 months.
The slowdown in market returns, prior to their recent recovery, has compounded this issue, further intensifying the difficulty of recruiting and retaining exceptional executives. Moreover, the fervent pace of private equity activity experienced in late 2021 has subsided, resulting in the absence of the performance that traditionally leads to substantial bonuses and carried interest payments due to lack of portfolio company exits.
Gains and losses
“Now is a favorable moment for asset managers to strategically expand their workforce by considering individuals they may have traditionally found challenging to recruit.”
Getting inventive with recruiting and compensation
While the economic downturn has led to some firms in the industry losing top executives, it also has created opportunities for aggressive firms to hunt and add talented leaders to their rosters.
“Now is a favorable moment for asset managers to strategically expand their workforce by considering individuals they may have traditionally found challenging to recruit due to competitive market conditions,” said Michael Patanella, Grant Thornton LLP’s National Managing Partner for Asset Management.
Regardless of the individual level of risk, firms have had to find inventive ways to compensate their executives amid low market returns. Asset management firms are working to compensate executives appropriately by:
- Reviewing the competitiveness of their pay relative to their peers to identify roles or job functions that are paid below industry levels.
- Rewarding executives with equity-based compensation when salaries or traditional bonuses have dipped due to performance.
Moreover, the recent resurgence of stocks, reclaiming their position in bull market territory in mid-June, has engendered a sense of optimism within the asset management industry. If this positive turn of events continues, it holds the promise of improved times ahead and potentially unlocks fresh avenues for compensating industry executives. Consequently, there looms the prospect of an imminent upswing in revenue for these firms, accompanied by a commensurate boost in executive pay.
Along with all the progress related to ESG in the asset management sector, there has been pushback from stakeholders who believe that the consideration of ESG factors is an impediment to maximizing returns. Numerous states have proposed or passed legislation restricting state pension funds from investing with asset managers who consider ESG issues in their investment decision-making process.
How do you stack up?
Benchmarking provides meaningful data
Regardless of the economy, it makes sense for asset management firms to undergo a yearly review of how their existing pay structures compare with that of their competitors.
“Are you losing out in particular areas of your executive team?” asked Rob Storrick, a Senior Manager, Human Capital Services. “Are other firms offering more money on either salaries, bonuses, equity awards or whatever it might be? Before you can make any sort of important decisions on compensation, you’ll need to understand how you’re stacking up relative to the market.”
Those three legs of the executive compensation stool — salaries, cash bonuses and equity awards — often rise and fall in response to market conditions. In a difficult environment for revenue and profits for asset management over the past few years, cash bonuses have decreased.
“When you are not able to compensate via salaries or cash bonuses, there needs to be another mechanism to retain top talent, because they can go to another company that may want the talent or is looking at expansion,” Patanella said.
Firms are turning more toward rewarding their executives with equity compensation, which can be provided in ways that can:
- Increase executives’ motivation to drive the firm to success. Equity shares awarded now will be worth more over the course of time if the firm is successful and provide a pay-for-performance alignment with shareholders. The mergers and acquisitions market in asset management will continue and a payout for ownership is a consideration for new equity partners.
- Incentivize executives to stay with the organization for a substantial period. Asset management firms can use multi-year vesting that keeps key talent retained at the organization for the foreseeable future.
Closely held, private, or public asset management firms concerned about dilution may consider phantom equity plans that mirror the many strengths of equity-based compensation but are instead paid out in cash at the conclusion of a vesting or performance-period. “You can keep people compensated and those numbers can stay high, but you’re not actually having to pay that out in the immediate future,” Storrick said. “So there are a lot of benefits to those phantom equity designs.”
Ups and downs in subsectors
Actively managed funds have an advantage
The nature of the asset management industry with its varying subsectors makes it difficult to generalize on executive compensation in the current market. Patanella said the current subsector executive compensation landscape includes the following trends:
Actively managed funds. Investors are willing to pay a premium for their accounts to be actively managed; Patanella said firms with a track record in actively focused and managed accounts still attract those premiums, which enable them to compensate their executives more handsomely than executives at passively managed funds.
PE. Variable compensation in PE is tied to sales of portfolio companies. Because sales and overall fundraising have slowed in the first half of 2023, executive and operating partner compensation has been stagnant but opportunities may abound in the future. Patanella said PE firms have been largely successful raising funds in the past, so the capital for deals exists, but bonuses tied to sales or carried interest payments aren’t plentiful for executives.
Registered investment companies. Patanella said retail investors are trying to time the market out of concerns that stock prices will decrease. “That’s never a good strategy,” he said. “It’s very difficult to time the market.” It’s not a good recipe for compensation of RIC executives either.
Reporting and clawback considerations
Make sure policies are up to date
Asset management leaders also are working to comply with emerging reporting requirements related to executive compensation that are designed to provide more transparency about pay.
These requirements include:
- SEC amendments requiring registrants to disclose information reflecting the relationship between executive compensation paid and an organization’s performance. The rules took effect for fiscal years ending on or after Dec. 16, 2022.
- SEC clawback rules that require securities exchanges to adopt listing standards requiring issuers to develop and implement a policy for recovering erroneously awarded incentive-based compensation to current or former executives. These rules are currently in flux as the New York Stock Exchange and the NASDAQ have submitted amendments asking the SEC to revise the effective date of the standards.
Although the SEC rules apply only to public companies, asset management firms that aren’t public may wish to protect themselves by including clawback exceptions in their executive compensation policies. Storrick said companies also may want to include more clawback protections in their policies than the SEC requires, particularly in view of the Silicon Valley Bank collapse fallout that brought significant attention to the issue.
“Firms will want to review whether their clawback policies are up to date and align appropriately with their business practices,” Storrick said.
Ebbs and flows affect recruiting and retention
Because of the nature of the asset management industry, there’s almost always an opportunity to grow.
For example, rising interest rates are a challenge for many firms and funds, but hedge funds that invest in distressed debt have had numerous opportunities as interest rates have soared over the past year. This has given them more resources to attract top executive talent, but this environment may not last forever.
As the S&P 500 reached a 13-month high in early June, there was evidence that markets were turning in a direction that could be favorable for executive compensation in the near future.
This may provide additional opportunities to add valuable talent to asset management rosters.
“It’s a little bit mixed depending on what the investment focus is and on the firm itself,” Patanella said. “But there are people trying to secure talent that maybe hadn’t been able to do that during the pandemic or before that. They’re bringing people in at very competitive salary and bonuses.”
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