Tuesday, December 5, 2017 Stamford, CT USA — Asset management professionals are enjoying a strong year in terms of compensation, but these favorable conditions might prove a brief respite. Industry cost constraints are already starting to affect compensation and will impact many more asset management professionals in 2018.
Asset management compensation is projected to increase approximately 7% from 2016 to 2017, according to the results of the 2017 Asset Management Compensation Study by Greenwich Associates and Johnson Associates. On average, compensation is higher in equities than in fixed income. The pay gap between equity portfolio managers and fixed-income portfolio managers widened from 2015–2016, with the latter group experiencing an average decrease in overall compensation of approximately 14%.
Despite strong markets and—in many cases—investment returns, many asset management professionals are in store for surprisingly tough compensation negotiations, whether they occur in 2017 or next year. Even amid strong cyclical performance, some powerful secular trends are working against the industry. Most prominent of these is fee pressure driven in large part by the shift of assets from high-margin active products to low-fee index products. Across the industry, costs also are being pushed higher by soaring technology expenses.
“The resulting margin pressure is forcing asset managers to manage costs aggressively throughout their firms. And for most firms, one of the primary costs is compensation,” said Greenwich Associates Associate Director William Llamas. “What we are experiencing—and what many more professionals will experience next year—is the delinking of investment results and compensation.”
Hedge Funds vs. Traditional Asset Managers
Overall annual incentive compensation at hedge funds is expected to be about 5% higher in 2017 versus 2016. Professionals working for hedge funds that have failed to deliver investment performance or attract new assets are likely already feeling the impact on compensation in 2017, as their firms’ margins get squeezed.
In equities, the pay differential for portfolio managers has reversed to approximately 0.85 times in favor of traditional asset managers, where 2016 compensation averaged $680,000, versus $580,000 at hedge funds. In fixed income, the historic disparity in pay actually widened from 2015 to 2016 and currently stands at 1.9 times. Average compensation for hedge fund fixed-income professionals climbed to approximately $940,000, compared to an average of $490,000 at traditional firms.
It’s Good to be Young and in Tech
It’s a good time to be in technology and data/analytics. Demand for talent in these fields is boosting hiring and compensation. In both areas, the fact that asset managers are being forced to compete for talent against companies across financial services, technology and virtually all other industries is putting upward pressure on compensation.
It’s also a good time to be young. At a time of tight budgets, asset managers recognize the value and relatively low costs of younger employees. For their most talented young workers, firms are willing to award annual compensation increases that, as a percent of overall pay, are very large. “These big jumps are still cheap relative to the much bigger compensation packages required to retain more senior employees,” said Johnson Associates Managing Director Francine McKenzie.