Battle of the bonuses at asset managers

Investment banks may become less attractive employers for fund managers as they withhold bonuses and defer pay.

Banks that formerly shielded their fund managers from deferral schedules that lock in bonuses for up to four years at investment banks are now extending those restrictions to their asset management arms.

“Investment banks are under pressure to reduce compensation as a percentage of revenues in all divisions, including asset management,” says Jon Terry, a partner in the reward and compensation practice of PwC.

While US investment banks have retained or boosted pay for their asset management divisions after a positive 2012, they are running behind the better performing independent fund management houses. J.P Morgan, the only bank to outline both pay and headcount for its asset management division, paid an average of $238k in total compensation last year. In 2011, this figure was $230.2k. Morgan Stanley kept compensation flat year-on-year at $841m. Goldman Sachs doesn’t break out pay for its asset management arm.

BlackRock, the world’s largest money manager with $3.8 trillion in assets under management, has been increasing performance-related pay on the back of a year when revenues grew 14% to $2.54bn. Average total compensation per head is now $313k, which outstrips that of the investment banks. Meanwhile, Aberdeen Asset Management paid its employees an average of £154.8k ($246.1k).

Unlike investment banks, independent houses aren’t deferring bonuses. “Deferrals and smaller cash bonuses in are becoming a concern for fund managers working for investment banks,” says one asset management headhunter, who declined to be named. “They may struggle to hold on to key talent and are relying on their brand name when it comes to hiring.” Lower pay at investment banks “puts them at a disadvantage when hiring,” said Amin Rajan, chief executive of asset management research firm Create.

A Morgan Stanley source says that employees in its asset management division earning over $350k are subject to the same 100% deferral schedules as those in investment banking. What’s more, portfolio managers are required to invest a proportion of their annual bonus in their own funds.  The bank declined to comment.

This could be a problem for investment banks, which have been expanding their asset management divisions in the last year. J.P Morgan added over 450 people to its asset management division in 2012, while Goldman Sachs has increased headcount by over 1,000 since 2010.

Not everyone views deferrals as a big concern, however. Richard Parkhouse, who headed asset management pay consultancy PRPi until its recent acquisition by PwC, says that investment banks simply increased base salaries for their asset managers to offset deferral schedules. “Performance-related pay may be down, but total compensation is broadly neutral on previous years,” he says.

And, of course, pay levels are only one concern in a climate of uncertainty. “Portfolio managers are not moving simply because of a 20 percent drop in pay,” said Rajan. “Job security, prestige and culture all come into play and investment banks compete well on these levels.”