Since last year, incentive compensation has significantly decreased at traditional asset management companies
By the end of 2022, a declining trend in asset managers' bonus income could give way to layoffs in the industry.
That’s according to a Johnson Associates analysis, which found employee incentives at conventional asset management companies fell 17.5 percentage points between the end of fiscal year 2021 and 2022.
The allure of asset management companies is greatly influenced by incentives, which make up any remuneration, typically bonuses, that is not included in the employee's original basic income.
According to Chris Connors, vice president of Johnson Associates, the reduction in incentives was caused by a decline in market performance. S&P 500 experienced its worst performance in more than 50 years in June. Particular asset groups, including active equities, also experienced notable outflows.
“Revenues are down, profits are down, incentives are going to be down,” Connors told Institutional Investor. Johnson Associates analysts estimated a 13% decline in aggregate earnings per share for fiscal year 2022.
Alternative asset managers are not exempted from headaches raised by the market slump and inflation. Incentives at private equity firms declined by 5 percentage points year over year, while incentives at hedge funds stayed unchanged from 2021 to 2022.
That drop came as a result of slowing fundraising, deal-making, and realizations, according to Connors.
By the end of 2022, Johnson Associates anticipates job cutbacks at traditional and alternative asset management companies due to the underperformance.
In fact, Connors said, several businesses have already started to subtly cut back on staff, mainly due to the slowing labor market. By the end of 2022, staff at traditional asset managers should expect less voluntary turnover and a bit more involuntary turnover — in other words, layoffs.
In 2021, asset managers — and the financial services industry in general — went on hiring sprees, doling out competitive base salaries topped off with generous bonuses to compete in the "war for talent."
As a result of inflation, Johnson Associates anticipates that basic pay will remain constant. Base salaries climbed by 5% in 2022 for the second year in a row, which gave businesses some breathing room in their recruitment and retention strategies.
“With incentives down or projected to decrease pretty significantly, it’s a way for firms to try to retain their talent and recognize that inflation is out there and impacting compensation in a real way,” Connors said.