Traditional Asset Managers Outpace Sell Side and Hedge Funds in Compensation Growth

2014 Incentive Compensation to Increase 5–10%, With Equity Products Outpacing Fixed Income

Strong performance has pushed up incentive compensation in the asset management industry, according to a new report, Asset Management Compensation: Second Choice No More, from Greenwich Associates and Johnson Associates.

• 2014 incentive compensation at traditional asset management firms to increase 5–10%, with equity products outpacing fixed income.
• Salaries will increase 3–3.5%, including merit and promotional budgets.
• Incentive compensation among hedge funds will vary much more widely, reflecting performance volatility from strategy to strategy and firm to firm.
• Employees at underperforming hedge funds can expect to see incentive compensation that is flat to down 5%, while incentives at better performers are projected to increase by up to 5% and perhaps higher for top performers on average.
• Modest turnover and hiring, but clear emphasis on performance management and pay differentiation.

“These ongoing positive trends are making asset management more appealing as a career choice for financial professionals, relative to a sell side that is still plagued by reduced compensation on results, intense regulation and somewhat diminished social status,” says Greenwich Associates analyst Kevin Kozlowski.

Nevertheless, job turnover rates remain near historic lows, despite a modest pickup in hiring over the past year. Voluntary turnover remains depressed due to professionals’ concerns about job security in an era when financial firms of all types are focused on cost minimization. To that end, firms are being more diligent and aggressive in separating high-performing employees from low performers and differentiating compensation accordingly.

Traditional Management Firms vs. Banks and Hedge Funds
Previously coveted sell-side positions are diminished in terms of job stability, societal prestige and, perhaps most importantly, compensation opportunity relative to job demands while incentive-based compensation for professionals at traditional asset management firms has almost recovered to pre-crisis highs. By contrast, incentive pay at investment and commercial banks is still down more than 40% from the peak.

The compensation differential between buy-side and sell-side pay has narrowed and for many investment professionals, perceived quality-of-life benefits with buy-side positions more than make up for that difference.

Although hedge funds pay somewhere between 1.5–2 times as much as traditional asset managers for comparable titles, incentive compensation at hedge funds is down some 35% from pre-crisis highs.

“As the end of 2014 approaches with considerable stock market volatility, the focus will be on cost management and performance differentiation will continue,” says Johnson Associates Managing Director Francine McKenzie.