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Bonuses Offer Ugly Reminder of 2001


Mutual fund executives wanting to put 2001 behind them may get a nasty reminder of what kind of year it was. Year-end bonuses for executives and wholesalers, typically handed out this month, are down significantly from the previous year.

For most people, bonuses will be down 20% to 30% said Kim Raynor, a director at Russell Reynolds Associates. In fact, while many companies are doling out smaller bonuses, some firms are handing out nothing to certain employees who have received them in the past, said Cara Meyers, a partner with Capital Search Group, an executive search firm in Boston which specializes in investment management and financial services companies.

"We've seen a variety of things, but most bonuses are down," said Meyers. "It's certainly not like those recent banner years where everyone's getting a big bonus."

While most firms, such as Fidelity, Vanguard, Janus and OppenheimerFunds, would not comment on compensation issues, it is expected that bonuses throughout the industry will be down. In fact, JP Morgan Chase has reportedly indicated that bonuses at the firm have been cut by an average of 20%, and as much as 40%.

A significant part of executive bonuses is based on how the company performed in the past year, and, by and large, companies did not do very well, according to Meyers. For example, because of the market drop, Putnam's bonuses for 2001 will be lower than they were for 2000, according to Matthew Keenan, a spokesman for the firm.

Putnam's third quarter 2001 revenue was $616 million, down 28.6% from the previous year, and assets under management dropped nearly 30% for the same period.

"The executive compensation that we disclose comes out in our annual reports, and that's several months away, but bonuses for all our employees are based on individual and firm performance," said Doug Kidd, a managing director at AMVESCAP, parent company of AIM and INVESCO. "Certainly, firm performances have been adversely affected this year. Revenues are down, and so the amount of bonuses and numbers of bonuses will be down for this year."

AMVESCAP's before-taxation profit was roughly $333 million for the first three quarters of 2001, down 35% from that of 2000.

It's difficult to gauge which positions will be hit hardest by the cuts because of the varying nature of compensation structures at all of the fund companies, said Meyers. Some firms defer a significant part of compensation until bonuses are distributed and offer a low base salary, while other firms try to attract talent with high base salaries, leaving less to hand out at the end of the year, she said.

"I've seen bonuses where a portfolio manager gets 10% at one firm, and at another firm, a manager with almost the exact same performance for the year got 100%," said Meyers.

Budgets for bonuses are generally set a year in advance, but that is adjusted throughout the year to account for shifts in assets under management and revenue, according to Charles O'Neill, a principal with Diversified Management Resources. In fact, if firms could have known that the fourth quarter of 2001 was going to be stronger than the previous three, bonuses might not have been cut as severely as they have been, said O'Neill. That, however, could bode well for next year's bonuses.

However, there are other factors that need to be considered. There is a shift throughout the industry from fixed salaries to those more tightly connected to individual and company performance, said O'Neill. While bonuses might be going up, raises could be eliminated, he said. Some firms have started capping salaries for executives at a fixed point, $100,000 for example, and other firms are likely to do the same, O'Neill said.

"Since we're entering into a much more cost sensitive market, I think compensation overall will come down in the next two to three years, regardless of in which direction the market goes," he said.

According to Meyers, firms are using this year's cut in bonuses to try to get back to a point where bonuses are given out as rewards for stellar performance, and not expected by each employee.

"There is a feeling right now in the marketplace to some degree that bonuses are part of the salary," said Meyers. "The reality of how it should work is that employees can earn a bonus if they do a great job. Someone who gets $100,000 in base salary and $25,000 as a bonus might view their salary as $125,000, but it isn't. Firms are trying to get away from that sort of expectation now."

O'Neill agrees that firms may try to implement a shift away from that mentality, but that changing industry expectations can be difficult.

"I think it'll take awhile for the marketplace to adjust to bonuses that aren't guaranteed," he said. "That's not something that's going to be easy for everyone to accept."