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Money Management

Majority of public firms’ CEOs see 2016 pay drop

Alan Johnson said the passive investing push hurt managers’ bottom lines.

Fink's, others' checks a bit lighter for bad year

BlackRock (BLK) Inc. (BLK)'s Laurence D. Fink received $25.5 million in compensation in 2016, one of a choir of money management CEOs receiving cuts in compensation in what was a challenging year for the industry.

Eight of 11 publicly traded asset managers, or firms with asset manager divisions, reporting so far, cut their CEO's total compensation in 2016 from the previous year, a Pensions & Investments review of corporate proxy material found.

Mr. Fink's reduction, 2% by BlackRock's calculations and 1.2% under Securities and Exchange Commission's reporting methods, was the smallest of the eight.

Others receiving compensation cuts — ranging from 4.1% to 62% — were the CEOs of Franklin Resources Inc., Goldman Sachs Group (GS) Inc., Invesco (IVZ) Ltd., Morgan Stanley (MS), Northern Trust Corp., OM Asset Management and Och-Ziff Capital Management Group, proxy filings show. Och-Ziff CEO Daniel Och's compensation was all in stock awards, resulting in a 62% decrease from the year before.

Of the three CEOs who got raises in 2016, the largest increase, 42.2%, went to Bank of New York Mellon (BK) Corp. (BK)'s Gerald Hassell. State Street Corp. (STT)'s Joseph L. “Jay” Hooley received a 35% hike and William Stromberg, CEO of T. Rowe Price Group Inc., 7.5%.

Alan Johnson, principal of employee compensation firm Johnson Associates, New York, said while asset management is still quite profitable, the financial picture was tougher in 2016. He said many asset managers saw net outflows and less revenue as investors moved from active strategies to index strategies and exchange-traded funds.

Last year, net outflows for active strategies hit a record high among the publicly traded money managers in P&I's universe.

An overall trend

CEO pay cuts at money management firms are following an overall trend for banks that began after the financial crisis as the highly paid top executives of the nation's largest banks saw compensation drops, Mr. Johnson said.

Still, until recently that wasn't the case for money manager CEOs.

The consultant said compensation reductions for asset management CEOs gained some traction in 2015 but the full blunt of the trend occurred in 2016 as the firms started seeing sustained revenue and asset drains.

New York-based BlackRock (BLK), the world's largest money manager with more than $4 trillion under management, did better financially than most other publicly traded asset managers in 2016. It maintained flat operating income from 2015 despite a 2% revenue drop, driven by declining performance fees.

The revenue decline matched the 2% cut in Mr. Fink's compensation and that isn't a coincidence. A BlackRock board of directors' compensation committee analysis cited the revenue decline as factoring into Mr. Fink's total financial package. The committee's report said 96% of Mr. Fink's total compensation is based on company performance.

Mr. Fink received $900,000 in base salary, an $8 million cash incentive, $4.15 million in deferred equity grants and $12.45 million in long-term incentives.

Among large publicly traded traditional managers, Franklin Resources CEO Gregory E. Johnson had the biggest percentage cut in compensation, 19.8%, according to P&I's review of proxy statements.

Mr. Johnson received $12.1 million in compensation in the San Mateo, Calif.-based firm's 2016 fiscal year (which ended Sept. 30): a base salary of $786,000, stock awards of $7.96 million, incentive plan compensation of $3.3 million and other compensation of $55,000.

“The 2016 fiscal year was a challenging one for the company as it saw declines in assets under management, investment performance and stock price,” the board of directors' compensation committee wrote in Franklin's proxy statement.

“The compensation committee evaluated the decline in 2016 performance consistent with its philosophy that executive compensation should reflect the company's performance,” the proxy statement continued.

The company finished fiscal 2016 with $733.3 billion in AUM, down 5% from the previous fiscal year and the three-year shareholder return was down 9.6%, the proxy statement said.

While Mr. Johnson's nearly 20% cut was the biggest reduction, total compensation awarded for all named executive officers was reduced by an average of 10%, the proxy disclosed.

At Atlanta-based Invesco (IVZ), with $812.9 billion under management, CEO Martin L. Flanagan saw a smaller but still significant compensation cut. His $14.607 million package in 2016 was down about 8% from 2015, proxy materials show.

Mr. Flanagan's 2016 salary consisted of $790,000 in base salary, a $4.045 million cash bonus, $9.65 million in stock awards and about $127 million in other compensation.

Volatility and headwinds

Invesco (IVZ)'s compensation committee said in the proxy materials that the company's 2016 financial performance reflected “volatile markets, numerous headwinds in the operating environment of many markets we serve and efforts to invest in our business for the long term.”

The committee said it reduced the companywide incentive pool, but did not disclose details.

In a proxy summary, the company reported it used these metrics to calculate Mr. Flanagan's compensation: adjusted net income of $1.3 billion in 2016, down 12.1% from 2015; annual adjusted operating margin of 38.7%, down 2.3 percentage points from the previous year; and a long-term organic growth rate of 1.9%, down 0.5 percentage points from 2015.

Invesco has revamped its long-term stock award program for the CEO and other named executives for 2017 and beyond. It will be based on company financial performance for a three-year period, instead of one year, the company disclosed in its proxy.

The changes come after less than 80% of shareholders last year voted in favor the company's “say-on-pay,” an SEC mandated advisory vote on the compensation of the top executives. Invesco's board said it made the changes “based on feedback from shareholders.”

But Glass Lewis & Co. LLC, San Francisco, still has problems with Invesco's compensation program for the CEO and other top executives. Invesco has a “sustained disconnect between pay and performance,” an April 4 report from the proxy advisory firm states, adding there are no set metrics that determine how much the CEO and other named executive officers receive in short-term incentive awards.

“In this case, shareholders should be seriously concerned with the company's failure to implement a formula-based short-term incentive plan with objective metrics and goals,” the report states.

It recommends that shareholders use the say-on-pay vote, scheduled for the company's May 17 annual meeting, to “express their concerns regarding the company's compensation practices.”

One CEO who got a major hike in compensation in 2016 is State Street's Mr. Hooley, whose $14.7 million compensation package was up 35% from 2015. But Mr. Hooley could have received more in 2016. The board of directors' compensation committee said the company's financial performance was “below expectations,” and awarded the CEO 83% of his short-term target incentive compensation, or $3 million.

The State Street compensation committee report noted it had a “favorable evaluation of Mr. Hooley's overall 2016 performance, including his significant progress in executing our digital transformation plan, the acquisition of GE Asset Management and the return to shareholders of approximately $1.9 billion of capital in the form of common stock dividends and share repurchases.”

But it also went on to say that revenue growth and shareholder returns lagged those of peers including BNY Mellon, BlackRock (BLK) and J.P. Morgan Chase & Co.

This article originally appeared in the April 17, 2017 print issue as, "Majority of public firms' CEOs see 2016 pay drop".