Higher demand, pay await investment executives

NEW YORK — Demand for investment industry executives is up as much as 15% from last year, with many firms paying higher premiums to bring top talent on board, according to Russell Reynolds Associates.

In its fifth annual Investment Management Recruiting Trends report, the New York-based executive recruiter said 2004 is the most competitive employment market in five years.

Annual compensation is 15% to 20% higher than 2003.

A chief investment officer/president was recruited to a firm with $110 billion in assets under management for a base salary of $500,000, a minimum bonus of $4 million and a long-term incentive award of $2 million, plus significant equity, according to the report. The chief operating officer of a prominent midsize asset management firm will earn more than $2.2 million in total compensation, including a base salary of $300,000.

"We have a lot of clients thinking about top-line growth again," Debra Brown, a managing director with Russell Reynolds' investment management practice in New York, said in an interview. "All of a sudden, (firms) are putting the cutbacks behind them and are really able to focus on building and reinvesting in themselves."

To be sure, pay is not at the all-time high reached before the stock market bubble burst, but it is "starting to creep back up," John Farnsworth, principal of Farnsworth Search Group Inc., San Francisco, said in an interview.

Russell Reynolds' report, based on qualitative and anecdotal evidence, said there is a surge in demand and compensation for senior compliance, risk management, audit and legal officers, as well as independent board directors, among firms seeking to keep up with today's regulatory environment. For example, Fred Alger Management Inc., New York, hired Katherine Feld as its chief compliance officer in February, and Morgan Stanley, also of New York, named Kenneth Winston as managing director and chief risk officer of its investment management division in August..

At the same time, the hedge fund universe remains a major source of job growth as money from large institutions and high-net-worth individuals pours in, and university endowments and foundations are in need of CIO talent.

"Normally our business starts to slow down this time of year," Nicholas Hurd, managing director and head of Russell Reynolds investment management practice, said in an interview. "It is just continuing unabated."

Increased job openings are giving some executives a chance to re-evaluate their career priorities. Russell Reynolds found that some hedge fund executives who spent at least two years in the hedge fund industry are now looking to return to "traditional structures" of the buy side. Their reasons include cultural issues, unrealistic investor expectations and lack of preparedness in operating, marketing and managing money all at the same time.

"This is a quiet countertrend," said Russell Reynolds' Ms. Brown. Traditionally trained analysts and portfolio managers come to the table with experience in a long-only environment, and suddenly "being underweight your benchmark isn't the same as being short," she added.

Russell Reynolds cited one portfolio manager who compared shorting in a long/short fund structure to "putting one's hand on the burner after years of avoiding the very companies that they are shorting."

Another said hype surrounding hedge funds makes it difficult to meet investors' expectations.

"I beat my benchmark by 150 basis points, but the investors, including the hedge fund that backed me, did not think this was good enough," the portfolio manager said. "I felt that it was not prudent to manage for ‘shoot-the-lights-out' performance, so I chose to return to a traditional money manager. ‘Lights-out' performance, in the manner that they wanted me to run my portfolio, would create a process that would be unsustainable in the long term, and I did not feel comfortable with that."

Renewed long-only demand makes it easier for disheartened hedge fund professionals to return.

"There are a lot of (hedge) firms and funds where they never reached critical mass and are folding," Ms. Brown said. "The hedge funds don't make big guarantees when they hire people."

Hedge funds are not always viewed as a career gamble, and many people are more than willing to make the jump into the $1 trillion industry.

"There is still a lure and attraction to the hedge fund world," said Henry Higdon, general partner and founder of Higdon Barrett, an executive search firm in New York. "As long as the growth occurs, we see people leaving the sell side and Wall Street."

Hedge funds within larger institutions will pay $1.2 million to $1.5 million in total compensation for heads of business, with a $400,000 to $500,000 base salary, Russell Reynolds said. Hedge fund managers with smaller firms have base salaries of $200,000 to $250,000 with "tremendous" upside potential focused on the "2-and-20 fees."(Hedge funds typically charge an asset management fee of 1% to 2% of assets, plus a performance fee of 20% of a hedge fund's profits.) Experienced hedge fund-of-funds managers will make $500,000 to $600,000, with compensation bringing their total annual salary to $1 million or more, depending on fund performance.

Among long-only equity portfolio management and research, money management firms in Asia and Latin America are reporting newfound demand after several years of little to no interest. Additionally, money management subsidiaries of non-U.S. parent companies are recruiting aggressively and boosting salaries to build staff, the headhunter report said.

Most clients are planning numerous hires in research and portfolio management, particularly in derivatives, portable alpha strategies and structured products. Head count in research is growing 5% to 20%, while portfolio manager level hires will be "flat to slightly up."

In 2004, seasoned long-only equity portfolio managers typically earned base salaries from $250,000 to $350,000, with bonus opportunities taking the package to as much as $1.2 million, plus long-term incentive payouts, where available, Russell Reynolds said.

Compensation for long-only investment research professionals with seven to 10 years of experience held steady at $400,000 to $550,000. Senior analysts with portfolio management responsibilities or those on a partnership track in research-driven shops can earn $600,000 through seven figures, the report said.

On the fixed-income side, recruiting among CIOs and portfolio managers was "surprisingly frenzied" in spite of rising interest rates, the Russell Reynolds report said. In particular, compensation is improving for those with proven track records. For example, structured product managers with significant credit backgrounds command total compensation packages between $400,000 and $750,000, including base salary and an incentive bonus plan.

University endowments and foundations also are seeking CIOs, and are willing to pay for seasoned professionals. This comes at a time when former university CIOs have left to start their own hedge fund firms, or have been wooed by existing firms, Russell Reynolds said.

"There have been record numbers of university endowment searches, senior leadership and senior investment roles, reflecting the pressure that alternative funds and fund-of-funds shops have put on folks out there," Ms. Brown said.

Executive-level hirings at universities are becoming more prevalent. The Seattle-based University of Washington Board of Regents recently named former Fidelity executive Keith Ferguson as its first CIO to manage the university's endowment, which exceeds $1 billion. The University of Virginia Investment Management Co., Charlottesville, responsible for overseeing investment assets of $2.5 billion, appointed Christopher Brightman as CEO earlier this month.

Compensation in this arena is $600,000 to $1 million for proactive CIOs who run an investment office or an investment management company, the report said. For those who take more direction from their respective boards, payment sits in the $230,000-to-$300,000 range.