Asset managers expecting bumper bonuses

Asset managers in Europe are likely to receive substantially larger bonuses this year, and firms are increasingly willing to buy them out to get the right people on board.

While much of the focus of compensation projections released last week by Johnson Associates was on the decidedly more diminutive bonuses for traders, it also suggested that asset managers were likely to receive 10-15% more than 2009.

But these predictions are largely based on the US market, and compensation consultants in London suggest that an increase of 20% on last year for European asset managers is a "conservative estimate".

"European asset managers are likely to increase variable compensation by at least 20% this year," says Richard Parkhouse, chief executive of asset management remuneration specialist PRPi Consulting. "They have more of an international focus than their US counterparts, which has meant performance has generally been more positive."

Such broad-brush moves are, of course, unlikely to be applied across the board. A recent example of contrasting fortunes in the fund management industry is that of Schroders and Gartmore - the former outperforming its peers with new fund flows of 5.4bn in Q3 and the latter cutting costs before a potential sale.

Even there, though, the firm is offering shares to key fund managers in an attempt to prevent further departures.

More generally, asset managers are still largely reliant on bonus payments as a retention tool for front office talent. While base salaries in investment banking have been on the up in light of punitive regulatory measures, asset managers have so far been reluctant to take the same path, suggests Jon Terry, head of the reward and compensation practice at PwC.

"Within certain functions, such as risk, compliance and internal audit, where asset managers are competing for a pool of skills with other financial services organisations, salaries have risen. But this hasn't happened in the front office," he says.

Instead, the focus has been on inflated bonus payments, the structure of which is being shaken up. Typically, 25-30% of variable comp is being deferred over two years, and will be paid in either stock options or units of the firm's own funds, and the remainder is paid in cash, says Terry. Clawbacks, however, are unlikely to make an appearance.

"The FSA is calling for a performance adjustment clause, which basically means an employer can reclaim compensation if certain targets aren't met, but we're not seeing asset management organisations looking to do this," he says.

At this point in the year, it's traditionally the norm for front office recruitment to be relatively quiet. However, with headhunters anticipating a less post-bonus movement than usual, prospective employers are giving the thumbs-up to buyouts.

"Most fund managers are aware that variable compensation is on course to be up this year and realise that, for senior hires, if they want to get people onboard before Q2-Q3 next year they have to buyout accrued bonuses and are largely willing to do so," says Martin Lorigan, head of asset management at Principal Search "But they are still reluctant to make explicit guarantees for 2011."

Still, working out how much is likely to be paid is becoming increasingly complex, with numerous factors being taken into consideration.

"The dominant factor in assessing bonuses is still fund performance, but it's not the only criteria," says Terry. "Other financial elements include business performance and AUM targets, but there are also softer factors like knowledge transferral and leadership qualities taken into account for senior executives."