Fund managers are freezing base pay, emphasising bonuses

Asset management firms are shaking up their bonus system so that variable pay becomes an ever-greater proportion of overall compensation packages. But don't get too excited - as they're going to be more closely tied to performance, it's going to be harder to earn them.

The latest projections from pay consultants Johnson Associates suggest that asset management firms are allocating a greater proportion of net revenues to compensation and benefits. Last year, around compensation was around 38% of revenues, and this is likely to increase to around 45% in 2009.

Johnson Associates puts this down to shrinking assets under management, combined with "compensation pressures", but it's also down to a fundamental shift in fund managers' pay practices, suggests Amin Rajan, chief executive of investment management think-tank CREATE.

Rajan suggests that staff costs at asset management firms typically range between 60-80% of total costs, but that most of this is fixed - only around 20% is allotted to bonuses.

This is changing: "The majority of fund managers have frozen base pay in nominal terms and are ensuring the bonus makes up an ever-greater proportion of take-home pay," he says. "They're making sure that costs are directly related to revenue, so that if revenue plunges due to poor performance or market factors, people are not rewarded."

He adds that the pre-crisis asset management recruitment frenzy meant that firms were offering guaranteed or discretionary bonuses (regardless of individual performance) because they feared losing revenue-generating staff. The new system is essentially a cost-cutting exercise.

This does, of course, run in direct contrast to investment banking bonus policies. Faced with clawbacks, deferrals and increased share options around bonus payments, banks are instead looking to (sometimes drastically) increase base pay.

Nonetheless, asset managers largely remain pessimistic about receiving a larger bonus this year than in 2008. A survey of headhunters and remuneration specialists by Financial News predicts an average fall of between 10-35% on last year, with only institutional sales and fixed income specialists likely to do better in 2009.