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Investment Professionals' Compensation Shrinks

It isn't happy news for U.S.-based investment managers who are watching their own bottom lines shrinking. Their median compensation is expected to fall to $148,000 in 2003, which represents a decline of 22% over 2001's frothier levels of $190,000 and a 10% decline from 1999's median income level of $165,000.

Those figures are according to a new biannual survey jointly released by the Association for Investment Management and Research, the not-for-profit professional membership group based in Charlottesville, Va., with 60,000 members in 112 countries or territories, and Russell Reynolds Associates, the executive recruiting firm of New York. The survey included the responses of nearly 16,500 portfolio managers, securities analysts, pension managers and senior level executives who are AIMR members, as compiled by Wirthlin Worldwide during the first quarter of 2003.

Although base salaries have held pretty firm, the economic downturn has vaporized much of the bonus pool at most firms. Incentive compensation plunged, with median cash bonuses expected to drop to $30,800 this year versus a 38% heftier median level of $50,000 in bonuses in 2001.

The bonus pool is the deepest at both mutual fund and hedge fund firms whose investment professionals tend to derive as much as 50% of their annual compensation from incentive bonuses.

Overall, the survey found that investment professionals who work for hedge fund firms are the most highly compensated, beating the competition's total compensation by 69%. And, this year, for the first time since the survey began six years ago, fixed-income professionals have been rewarded with beefier compensation than their equity counterparts.

Who is suffering the most? According to the survey, global equities portfolio managers are crying the loudest, having seen their compensation drop by the largest percentage from 2001 levels -- a whopping 40%. Right behind them, seeing their income decline 33%, are global equities securities analysts.

Even corner office executives have been carrying lighter wallets these days. CEOs expect to see their bonuses drop by more than 50% in 2003.

Some top honchos bit the bullet last year, according to SEC filings. Larry Lasser, 60, president and chief executive officer of Putnam Investments of Boston, saw his bonus fall to $7 million in 2002, down from $17 million in 2001 and $33 million in 2000, although his base salary remained a cool $1 million. Mario J. Gabelli, 60, chairman, CEO and CIO of Gabelli Asset Management of Rye, N.Y., saw total compensation of $37.3 million last year, down from $47.1 million in 2001.

Investment professionals employed by securities broker/dealers expect to see their compensation erode the most -- a whopping 38% from 2001 levels. Mutual fund managers can expect a 29% drop in compensation, although they continue to earn the highest median compensation of $191,000.

The whole downward compensation trend points to a fundamental shift in the way that financial service organizations approach compensation. Individual compensation is now much more closely tied to the holistic performance, profitability and success of the larger organization, said Debra Brown, a managing director in the investment management practice of Russell Reynolds. The survey's results show that over the past two years, organizational profitability weighed more heavily into the way that bonuses were paid.

There is actually good news for more veteran investment professionals. According to the survey, experience counts. Investment professionals with five or more years of experience typically get paid 16% more than junior workers, with a median compensation of $171,650. For those with two decades or more of experience, that number jumps to $205,000, 39% higher than the average.

The type and size of a firm also affect compensation, the survey showed. While bigger companies, defined as those with $5 billion or more in assets under management, pay more than smaller firms, the difficult environment has caused pay to decline at about the same rate both at large and small firms.

The biggest fundamental underlying change is a move away from paying mutual fund portfolio managers and other investment managers based upon the performance of the asset class they preside over, said Charles O'Neill, principal with and Diversified Management Resources of Boston, a marketing and executive recruitment firm in Boston. "An argument can be made for the slow migration to a fixed-salary structure, plus periodic bonuses," he said.

That made them more vulnerable to jumping ship, for the likes of hedge funds and other organizations, O'Neill added.

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