Fund manager pay is set for an industry-wide overhaul in the next few years as investors and regulators demand more transparency, according to a report from PwC.
“Beta masquerading as alpha will be less significantly rewarded.”With asset management margins falling and operational costs rising even as total industry assets increase, staff pay will fall relative to assets in the next five years, the accountancy and consulting firm predicted. PwC foresaw a 59% increase in total investable assets to $102 trillion by 2020, making asset management the “biggest single component of the financial services sector.”
“Increased costs and pressure on fees will squeeze margins,” PwC’s report stated. “At the same time shareholders will demand improvement in returns. As a result, pay may not increase at the same rate.”
The link between staff rewards and client outcomes should deepen, the report said, rather than corporate performance-tied compensation, “over which many employees have limited direct influence.” The rise of “passive and alternative strategies” will also drive firms towards compensation based on team performance rather than star managers.
Already many firms are paying employees via deferrals into their own funds or company shares, PwC reported. “Around four in five firms have broad-based deferral plans in operation and, of these, 50% now operate deferral into funds,” the company said.
At the same time, demands from investors and regulators for better transparency and governance will lead to “an increased requirement for significant levels of pay to be robustly justified,” the report continued. “Beta masquerading as alpha will be less significantly rewarded.”
Asset management firms should also prioritize talent development to solidify succession plans for critical staff members, PwC said. More than 80% of companies surveyed said they had a formal succession plan in place for employees, but “only a small number” made appointments through these processes in 2014.
“Preparation can be key to reducing reputational harm and maintaining investment performance in the case of a high profile departure,” the report stated.
Developing and maintaining a good workplace culture will also be important for asset management firms to succeed in the long term, PwC argued. “An inclusive, satisfying working environment with career development opportunities not only contributes to keeping talented individuals happy, but also attracts investors who reason that an organization with an ethos based on teamwork and synergies is more likely to generate new ideas and bring them to fruition,” the report said.
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