Scandal Forces Firms to Upgrade Executives
January 26, 2004
With a scandal comes a scramble. Major changes among top executives are taking place at Bank of America, Putnam, Alliance and other high-profile firms.
A report by Russell Reynolds Associates, New York, finds that low performance and high betrayal have created a "fix-it" atmosphere at companies.
In significant demand are CEOs and COOs with "confidence-under-fire," rather than just creative energy - particularly with regard to how to navigate the treacherous fund scandal waters. Also, the right experience, as opposed to just 20 years or more in the business, is now a leading criteria for landing a job in the executive suite.
"It remains to be seen how deeply market-timing issues will affect the supply of U.S. equity managers next year," according to Russell Reynolds.
Alex Thompson, the primary author of this year's report, said in an interview that because people have become scared off by the scandal and what it has done to top executives, investors have parked their money in safer vehicles like index funds, waiting until an "all clear" signal is heard. (See related letter to the editor, page 3.)
"The issue now is, Have all the apples shaken loose?'" Thompson asked. "Has everybody who is going to be tagged gotten tagged?" Thompson did emphasize, however, that a larger percentage of companies have not been "tagged" than have.
"As a rule, I think that the industry is going to take this hit and survive it nicely," he said. He said that since the report, which Russell Reynolds issued late last year, a pick-up in both confidence and performance has been felt.
Then there is the issue of compensation, which is lower and seemingly less important to those receiving it than it has been. Bonuses, which have recently come under intense scrutiny, are about the same as they have been. In fact, in its preface to the numbers, the executive recruiting firm called "No performance, No Bonus" its fifth and last "theme" of the report.
"Investment talent unable to achieve performance targets in 2003 will not be receiving bonus payouts this year," the report declares.
Multi-year contracts are not as stylish as they once were, though Russell Reynolds does say that in dire situations, they are still handed out.
This reflects complementary figures that executive compensation consultant Pearl Meyer & Partners, New York, released last month showing that most Fortune 200 firms, including investment management holding companies of mutual fund complexes, are moving toward performance-based compensation packages (see MME 1/12/04). However, at the CEO level, according to Pearl Meyer, executives can expect bonuses of 10% to 15% this year, due to the turnaround in earnings.
Issued in November, the Russell Reynolds report found that strong overall showings in both the third and fourth quarter have created a feeling among executives that compensation may return to glitzy 2002 levels. But for now, sustained performance and active roles by management are superseding issues of compensation.
A $250,000 salary for a sector fund manager could only top out at about $500,000, if that manager reached bonus levels tied into the results of individual sub-sector products.
Bonus levels, where they are earned, are still somewhat high, but just not as high as they were during the seemingly long-ago heady days of the bull run.
A large-cap core/growth manager at a U.S. equities firm, the report says, made $240,000 in 2003, with a chance to make four times that by earning bonuses.
One thing is certain, though: Compensation is way down. A large-cap value portfolio manager who made $1.5 million when the market boomed, made half that in 2003. A senior disciplined/quantitative portfolio manager made $600,000 in 2003 after clearing $1 million in 2002.
Hedge Fund Fast Track
So it would seem that the trend of top portfolio managers scampering off to hedge funds may begin to explode again. After all, several well-known and successful managers from companies like Fidelity Investments have left for hedge funds over the past few weeks.
The attractiveness of hedge funds for portfolio managers lies in the stake of the company they receive. Russell cited that an experienced hedge fund manager who made between $300,000 and $400,000 cash in 2003 held an equity stake in the company worth more than $1 million on top of that.
While not offering numbers for managers experienced in mutual funds but not in hedge funds, a $1 million-plus stake in the company would act as a nice lure for fund managers.
But Thompson said that his report did not find a "a specific spike" in the mutual-to-hedge fund run, at least not like the one seen in 1999 and 2000.
For the higher-net-worth clients, the push to lure skilled and personable portfolio managers from all segments of the financial services industry has been heavy, although the report does not offer insight into how much movement has actually happened.
Russell did say, however, that "firms with brand identity, product platforms and infrastructure are attracting a lion's share of talent."
When the wirehouses that control the separately managed account (SMA) and other parts of the high-net-worth market were building up their businesses, they usually offered commission-based compensation thanks to the soaring market. But now, base and bonuses make up the bulk of the pay of their managers.
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