Rising securities markets stimulate higher institutional profits. These profits trickle down to fund ever larger year-end bonuses. Unlike other industries, star performers in the financial world earn the lion’s share of annual compensation as a bonus. Firms like Fidelity, Schroders, Pimco and Invesco share a common problem of holding onto superstars. Buoyant markets lead competitors to seek competitors’ top employees and super-stars seek larger platforms.
The stakes are high: headhunters are engaged to quietly inquire about arranging discreet meetings. Firms do not simply poach each others’ staff. Alternatively, enticing capital knocks on the star’s door and offers the potential of a new hedge fund or capital management platform.
Market and Compensation Levels
When markets trade poorly or decline during a global recessionary period, firms generally earn less money. Financial institutions’ teams receive lower bonuses in these years. Because any employer firm may perceive conditions as a buyer’s market, its employees keep heads down and praise leadership. In “Summary of It Takes a Pillage,” team dynamics shift as the markets rise again. The most productive team members campaign for a higher percentage of the bonus pool whilst taking meetings outside of the firm to compare offers.
Investment Banks and Star Culture
According to a 2013 study at Saïd Business School (Professor Alan Morrison), and the University of Virginia (Zhaohui Chen and William Wilheim), “performance-based compensation may cause junior bankers to act in their own self-interests, which are often at odds with those of their clients.” Indeed, junior team members explore potential opportunities for advancement within the existing team or at another firm.
However, investment industry headhunters stress caution in making too many moves too quickly. Deborah Rowe of Oasis Partners U.S. says, “The junior employee should establish a baseline of performance before seeking new opportunities. He or she should plan to stay at the new firm at least two to three years. That can seem like an age on Wall Street, especially if markets and bonuses keep going up.”
Decades ago, leaders at the top of an organisation or within a buy or sell-side firm seldom left unless involuntarily displaced. As markets rise, leadership skills are in demand. Name-brand firm CIOs receive offers to run a new business, manage a new financial organisation, enter the world of hedge funds, or lead a government agency. In the U.S.:
–Pimco’s El-Erian left the firm in 2013 to head up President Obama’s Global Development Council. As a result, Pimco investors took their money elsewhere. Pimco suffered capital outflows after El-Erian’s departure.
–Kris Jenner of T Rowe Price raised $100 million and started his own health care hedge fund.
–Ron O’Hanley, head of Fidelity asset management arm, recently co-announced his departure without declaring his next steps.
UK’s top financial firms report similarly senior financial moves:
–Neil Woodford, former head of UK Head of Equities for Invesco Perpetual, announced a move to Oakley Capital, a private equity firm. He will manage money at Woodford Investment Management LLP, a firm incorporated 15 January 2014. He starts effective 1 May, in order to comply with his Invesco employment agreement.
–Richard Buxton, formerly of Schroders, joined Old Mutual Global Investors last year. Recruiting Buxton to Old Mutual was just good business: Buxton’s management of Schroders’ UK Alpha Plus fund is a decade’s long top performer. Old Mutual saw a £300m inflow of new capital seeking Buxton’s management.
Key Man Risk
Slightly smaller firms can suffer the impact of key man risk when a senior leader leaves for greener pastures. For example, Aberdeen Asset Management’s Fitch credit rating of A- demonstrates the importance of ‘key employee’ departure risks. The company sports an exemplary performance record but recognizes that the company’s star, Hugh Young (head of its Asia business), could affect the company’s competitive image. The company paid Young £5.090M in 2013, only less than Martin Gilbert, Aberdeen’s CEO.
Key Employee Retention
Most financial industry professionals, on buy and sell-sides, say that compensation is the best means of locking in significant employees. “This is the money business. Don’t let anybody tell you it’s not about the money,” says Oasis’ Rowe, “because that’s really what most of it’s about.”
A senior consultant at McKinsey disagrees. “Our New York and London financial industry clients tell us, yes, compensation must be competitive and then some. ‘Comping’ the senior maverick leader is difficult, but it can be done. At some point, the incoming employee has to say ‘I believe in the future of this business’ and mean it. And small perks can mean a lot to some key employees: a standing or treadmill desk to keep her in shape or the ability to keep a companion dog at the office can matter as much as a million in cash or options.”
The global investment community knows “investors don’t like surprises.” Similar to a surprisingly bad earnings announcement in the corporate world, the loss of a key leader or rising super-star is bad for business. Capital departs the firm as investors make up the reasons why the leader left. And retaining capital is the real reason that organisations need to retain key employees.