Manager compensation up due to retention, demand

After a very strong 2021, many money managers are paying the piper when it comes to employee compensation. But for the most part, the higher combination of salary, equity and bonus did not adversely affect profitability, industry sources said.

"Last year was the most profitable in history for asset management. The industry did very well," said Yariv Itah, principal at Casey Quirk, a practice of Deloitte Consulting LLP, New York, in an interview.

"Higher compensation as a stand-alone factor hurts profitability, but there was a package of events that tempered the situation in 2021," including strong market returns and high revenues, Mr. Itah said, adding "compensation is not at the level now that it will hurt a lot of managers."

Compensation based on bonuses and equity, but not base salary, rose between 12% and 18% for money managers in 2021, compared with 5% in the prior year, thanks to market appreciation and inflows into fixed income and alternatives, said a report from Johnson Associates Inc., New York, which tracks asset manager compensation.

The firm found that private equity compensation jumped between 15% to 20% for the largest firms and was up between 12% and 18% for mid to large companies, compared with 5% for both categories in 2020.

Data from Casey Quirk found that smaller money managers increased their compensation by 20% in 2021, compared with 9% the prior year as "managers fought to hold on to their talent by increasing their compensation package," Mr. Itah said.

Higher compensation for money managers in 2021 was driven by a very competitive recruitment environment that created wage inflation as firms sought to retain existing employees, industry observers said.

"This definitely is the hottest recruiting market I've ever seen," said Andrew Thompson, managing director in the asset management practice of executive recruiter Sheffield Haworth Inc., New York.

"Companies are paying up to get high-quality candidates and compensation has increased year-over-year to the highest I've ever seen," Mr. Thompson said.

Compensation packages also were driven up as money managers sought to add traditional and digital marketers and technology specialists, as well as a range of investment management personnel, all of which are very competitive areas, sources said.

On the traditional investment side, Mr. Thompson said in-demand strategies include international small-cap-equity, emerging markets equity and fixed income.

The hiring market is especially tight for private equity, private credit, direct lending, real estate and other alternative investment strategies, observers said.

"Alternative strategies just exploded in popularity with investors, and fees remained high in 2021," said Alan Johnson, managing director of Johnson Associates.

"Competition for recruiting private market managers is insanely hot because there just aren't that many very experienced, very talented investors out there. Private market firms are constantly trying try to poach the most experienced talent from each other because candidates are comparatively scarce," Mr. Johnson said.

Two other areas of intensely competitive recruiting are for candidates with experience in managing ESG investment strategies and for candidates with diverse backgrounds, sources said.

"Adding ESG investment professionals is difficult because experienced talent is very scarce. People with the right skill set are being bid up," said Amanda Tepper, founder and CEO of Chestnut Advisory Group LLC, Westport, Conn., a management consulting firm that works with money managers.

The search for candidates with diverse backgrounds also is extremely competitive.

"Every manager is trying to increase the diversity of their employee base and is having a hard time because the talent pool is small," Sheffield Haworth's Mr. Thompson said.

Many publicly traded money managers, including the world's largest money manager, New York-based BlackRock Inc., combine employee compensation and benefits in their earnings reports.

BlackRock reported compensation/benefit costs that were up 19.9% in the year ended Dec. 31, compared to 12.8% in 2020, fourth-quarter earnings reports for each year showed.

BlackRock, which managed $10.01 trillion as of Dec. 31, declined to comment.

State Street Corp., Boston, reported compensation/benefit costs across the whole firm, including State Street Global Advisors, as up 4.6% in the year ended Dec. 31 compared to 6.3% in 2020, in its fourth-quarter earnings report.

State Street did not respond to a request for an interview, but during the firm's Jan. 19 earnings call with analysts, Eric Aboaf, executive vice president and chief financial officer, told analysts: "We saw an opportunity to correct an imbalance in the competitiveness of our compensation program by accelerating expenses associated with certain deferred cash incentive awards," according to a transcript of the call.

He said the change will "allow us to realign the mix of immediate vs. deferred that cash in our incentive compensation awards in future periods which will make our pay practices competitive and enable us to better attract talent in an increasingly tight talent market."

SSGA managed $4.14 trillion as of Dec. 31.

Alternative investment manager Blackstone Inc., New York, had growth of 222.5% in combined compensation and benefits in the year ended Dec. 31, compared with -15.6% in the prior year, said the firm's fourth-quarter earnings reports for both years.

Incentive fee compensation was up 122.7% in the year ended Dec. 31 compared to 0.2% in the previous year while realized performance allocations compensation increased 175.3% in 2021 compared with 27.3% the previous year.

Blackstone did not respond to a request for comment.

Blackstone managed $880 billion as of Dec. 31.

When it comes to paying higher compensation, money managers are willing to find cost savings elsewhere to afford the increase, said industry watchers.

"Compensation is the largest expense for money managers. It is extremely important to pay your employees enough to retain them," said Catherine A. Seifert, vice president and equity analyst, CFRA Research Inc., New York.

"Firms will pay more when they have to as they seek employees whose investment performance will help to raise revenue. When necessary, firms will cut costs in other areas, but not in investment," Ms. Seifert said, adding "many firms had pretty solid revenue in 2021."

One aspect of higher compensation may come back to bite asset managers.

"For the past five years, money managers have been subject to huge fee pressure and the question going forward is how will that impact profitability in the face of higher compensation. How can you offset it particularly in an inflationary environment?" said Chestnut Advisory's Ms. Tepper.

"As long as markets are up, (total fee revenue) will go up for managers, but it's going to be more difficult for asset owners to exert more pressure on fees given higher personnel costs," Ms. Tepper said.

Managing through the COVID-19 pandemic, dealing with the possibility of losing personnel and maintaining firm culture is not easy for managers, sources said.

Los Angeles Capital Management LLC, Los Angeles, is increasing both salaries and the number of its 100 employees who own equity in the firm, said Daniel E. Allen, CEO and president.

"We haven't seen the Great Resignation among our employees because we focus on the combination of compensation, culture and career path," Mr. Allen said.

Another important aspect of compensation is equity ownership in the privately owned company, Mr. Allen said, noting that nearly 50% of employees now are owners.

"Our equity-oriented culture is an essential tool for recruitment and retention because it helps to align employees' interest and engagement with the company. The firm's independent status also is a draw for new employees," Mr. Allen said, adding "Los Angeles is a tough place to recruit new employees because costs are high and commuting is difficult."

Los Angeles Capital managed $36.5 billion in equity strategies as of Dec. 31.