Despite strong year, bonus hike not in the cards

Asset management professionals are likely to see incentive pay for 2019 remain flat or drop slightly, even after a much stronger year for financial markets, recruitment and compensation sources say.

As such, employees may need to temper their pay expectations, as money managers look for other ways to incentivize and retain staff, such as providing career-enhancing job opportunities.

Managers are currently "loath to add in fixed costs, and I don't see that changing," said Alan Johnson, managing director of Johnson Associates Inc., New York. And given industry headwinds such as fee pressures, he doesn't believe managers would try to make up for a dearth of big bonuses by increasing salaries or other entitlements for staff.

"As the industry continues (in this direction), it will make some people uncomfortable because pay isn't as predictable as it once was," he said.

Since 2015, year-end incentives for asset management professionals in traditional equities and fixed income have wavered, drifting down in 2016, then increasing in 2017 and 2018. Johnson Associates predicts year-end bonuses for 2019 will be flat to down 5%.

In comparison, 2019 bonuses for private equity and hedge fund professionals are expected to be flat to up 5% over last year, Johnson Associates predicts.

Katie Vande Water, a partner in executive search and advisory firm Wilton & Bain's corporate practice focused on asset management, also expects bonus pay to be flat to down for asset management professionals in both sales and investment roles.

"It was a great year in the markets, but does that translate to revenues to the firm?" Ms. Vande Water said, noting that improved markets don't necessarily push pay in the same direction. Firms' revenues have taken a hit as a result of lowered fees, she added.

In 2019, the S&P 500 soared 31.5%, while the Bloomberg Barclays U.S. Aggregate Bond index delivered 8.7%. In 2018, the S&P 500 was down 4.4% in 2018 while the Bloomberg index was up 0.01%.

Ms. Vande Water has additionally seen larger firms moving away from giving investment professionals a share of revenues from products they manage in favor of a base salary and bonus package. For institutional sales professionals at larger firms, many also have moved away from incentive plans with commissions to a base and bonus structure, she added.

But for investment professionals at smaller firms, revenue-sharing is often still used "because they are needed to attract people who are in build mode," she said.

A combination of factors, including pay, are resulting in more professionals being open to new opportunities from competitors, Ms. Vande Water said. Factors include the fact that pay has not increased for some professionals, the change in compensation structure for sales and investment staff, and a shift in mindset among talent.

"Part of it is cultural. People really want to work in a place where they feel valued and it's a nice place to work. I also think there's a lot of folks at a larger firm that think it could be fun to work in a more entrepreneurial environment" whether that be a startup or smaller firm, she said.

"I think people are willing to make moves. And frankly, firms are still quietly cutting (jobs). It's not big-headline layoffs, but they are cutting."

The heightened potential for talent to be lured away is a slight change from past years particularly for investment professionals, who typically would be less likely to move due to the impact it can have on clients or the firm's business, Ms. Vande Water added.

While certain high-performing investment professionals "are still commanding top dollar" from money managers, there has been an increased focus on succession planning, according to Amanda Grant, a New York-based partner at executive search firm Calibre One.

This has sometimes resulted in portfolio managers or analysts being given "bigger impact positions" — as opposed to bigger pay packages — as a retention tool, Ms. Grant said.

"There is a lot of focus on succession planning, so firms are very conscious of balancing compensation" for those who are not yet lead portfolio managers or senior analysts, she said. "Balancing compensation means someone might not get the dollar bonus (amount) they were hoping for, but perhaps the trade for that is you are going to be responsible for an additional 10 names in a portfolio or (the firm wants you) to lead the research efforts in the Middle East," she cited as an example.

"There's a lot of value for that progression … so they might not make a move if they didn't get the compensation they wanted one year," Ms. Grant added.

Over the next five to 10 years, overall compensation for investment professionals globally is expected to be relatively stable, according to a report published by the CFA Institute in May.

Among 133 respondents in an industry leader opinion survey, 32% expected compensation to grow somewhat (1% to 2% annually), while 26% expected pay to "stay about the same." Another 23% of respondents expected compensation to decline somewhat (down 1% to 2% annually), the report said.

Recruiters had mixed thoughts on the effect that technology may have on pay.

Chris Connors, an associate at Johnson Associates, said in an email that the advent of new technologies for money managers will have a "neutral" impact on professionals in investment and sales.

"Assuming they have the analytical skills that are required going forward, (they) should not be heavily impacted," he wrote.

For professionals in support roles, however, "we believe there will be a negative impact on pay due to technology. There will be more people than jobs available and technology will likely reduce their impact going forward," Mr. Connors wrote.

Jim Cooper, founder and managing partner at executive search firm Concentriq LLC, Wenham, Mass., believes that the implementation of technology such as artificial intelligence and automation into investment processes has resulted in lower pay for investment staff when factored with other industry pressures.

"Some of this (trend) is because of the lower-fee business that is out there," Mr. Cooper said of lower pay. "At the same time, you are seeing asset managers on the margin increasingly turning to systematic approaches as a factor in investment decision-making." Ms. Grant said that AI could detract from, or increase the value of, investment staff, depending on how it is used.

Technology "could have a positive impact on compensation because (it is) improving the results of an investment process that investors already liked and chose to invest in," Ms. Grant said. On the other hand, tech like AI can negatively impact active investing if it is "not being used as a value add."

In any event, staff holding technology or data analytics expertise will continue to be able to command higher pay, Ms. Grant said.

"It's certainly impacting how they are valued in their roles," she added.

Ms. Vande Water noted that firms that are building data-science groups or hiring data scientists, whom they have to "pay up for," must sometimes take a hard look at where money is being spent in other parts of the organization as a result.

Hiring efforts to bring in talent with this expertise "is having an impact on compensation, particularly bonus compensation, for existing employees," she said.

Paying up for talent can shrink the bonus pool, cause smaller raises and push firms to consider reorganizing, which may result in layoffs, Ms. Vande Water said. "I think there are number of firms that are experiencing that," she added.