Bonuses down for 2009 despite market jump

Incentive pay for traditional money management, hedge funds and private equity will fall on average 15% to 25% below 2008 levels, even with the market rebound and a stabilizing investment industry, according to a new study by compensation consultant Johnson Associates Inc.

The “market rebound creates misleading compensation expectations,” according to the study, which looked at third-quarter trends and year-end projections in financial services compensation. Lower assets under management and high water marks have prolonged the downward pressure on incentive pay, the study said.

The drop expected this year comes on the tail of the steep drop in 2008 performance bonus levels from pre-market meltdown levels in 2007.

Among the findings:

• Private-equity bonuses are projected to fall the sharpest among asset managers, declining on average 20% to 25% from 2008 at both independent and affiliated firms. Incentive pay is being hurt by slower investment activity due to reduced leverage, the study said.

• Average bonus pay for equity managers in 2009 is expected to fall 15% to 20% below 2008 levels.

• Fixed-income managers will fare better, although on average, bonus pay is forecast to fall 15%. Fixed-income firms, whose fees are lower in comparison with other asset classes, have collected a greater proportion of total assets under management than they have historically, but the study noted that the industry is “beginning to see some movement back into equities.”

• Incentive compensation at hedge funds, both independent firms and those part of larger companies, is expected to fall on average 15% to 20% from last year. The reasons: A “considerable decline in assets,” reduced management fees, and pressure on performance fees continued because “many firms still trail their high-water mark” — meaning hedge fund portfolio values have to surpass their previous high before managers can receive performance fees again.

“Bonuses will be down sharply again for professionals at asset management firms and hedge funds, whose performance has stabilized somewhat but is still lagging,” Alan Johnson, managing director of Johnson Associates, said in a statement about the study.

For 2010, incentive compensation is expected to rebound, but not yet up to 2007 average levels, the study said. “We are expecting 2010 to be a much better year for those sectors as long as the market continues as it is,” said Michelle Vitale, senior analyst.

Johnson Associates won’t project 2010 performance bonuses until May, following the first-quarter financial filings of companies.

The 2009 projections mark the second consecutive year of performance compensation decline in asset management. In 2008, performance compensation declined on average 25% at equity managers, 20% at fixed-income managers, 25% to 35% at hedge funds and 20% to 25% at private-equity firms, Ms. Vitale said.

“Asset management compensation declines for 2008 and 2009 are the most significant declines in recent memory,” Ms. Vitale said. “Asset management compensation also faced declines in 2001 and 2002, although the recent downturn has been slightly more severe.”

The median total compensation, including incentive pay and $260,000 in base salary, is projected at $750,000 for 2009 for senior portfolio managers of portfolios with $1 billion to $3 billion in assets, according to Johnson Associates.

Median total compensation for senior managers of portfolios with less than $1 billion in assets is projected to be $600,000, consisting of $250,000 in base pay and a performance bonus.

David A. Morris, managing partner in the Houston office of Heidrick & Struggles International Inc., said the survey numbers “make sense.”

“The business is driven by a revenue stream based on assets under management … and 2009 asset levels are below 2007 asset levels.”

But Mr. Morris said the industry is “incredibly resilient … Most [investment managers] take a long-term view with their careers and generally stick with their firms as long as the business continues to perform with market expectations.”

“We are nearing the end of this cycle, and 2010 will play out better in terms of compensation,” he said.

Michael Castine, chairman of the investment management practice of recruiter Korn/Ferry International, also agrees with the study’s findings.

“With the outflow of assets, firms are rethinking how they pay people and what the bonus pool is,” he said. “It’s easier to attract people to firms now, because you don’t have to pay as much, because they are tied to expectations of a big bonus.”

“While it’s a great time to be recruiting. the flip side is, good talent will always command top dollar,” Mr. Castine said, but the amount won’t be as high as in the upward-moving market of two years ago.

“If compensation was an equity play, we’d be in a value mode,” Mr. Castine said.

Barry B. Burr is a reporter for sister publication Pensions & Investments.