Over the past several years, since the height of the financial crisis, the financial industry faced increasing criticism regarding executive compensation. Around the world, taxpayers saw financial institutions being bailed out with public money, while bankers in general were forced to sacrifice very little. While there were some short term reductions in bonuses and incentives during the darkest days of the recession, it seems as though overall such payments are increasing again.
In some countries, such as the United Kingdom, politicians have been successful in enacting legislation capping the bonuses of bankers to 100 percent of their annual salary, or up to 200 percent if specifically approved by shareholders. Many are calling for expansion of this legislation into the hedge fund and private equity industries, but others are suggesting that may not be necessary. Increasingly, investors are the ones calling for change, as they see an increasing gap between the returns provided to their account, and how much their investment managers are making.
Man Group to Cap Bonuses as Performance Falls Short
As reported by Laurence Fletcher of Reuters, hedge fund giant Man Group will be one of the first to surrender to investor demands and radically reform executive compensation. According to its 2012 annual report, short-term annual cash bonuses will be limited to 250 percent of salary for its executive directors, following discussions with shareholders. Further, no bonuses would be paid out to top executives in 2012 at all.
This reflects the direction of new chief executive officer Emmanuel Roman, who is desperate to turn around the beleaguered firm. Substantial customer outflows have impacted the firm in every quarter for the past four years – other than a brief respite in the first half of 2011. Worse, for shareholders in the firm, share prices have fallen by two thirds over the last two years.
Increasingly, firms are being called upon to implement quantifiable financial metrics in order to more rigorously measure employee and executive success. Man has implemented change in this area as well, moving 80 percent of its long-term deferred bonus incentives into a structure that reflects tangible financial measures. Some have criticized using hard numbers as the basis of compensation due to the risk – it may incent executives to manipulate financial results. However, Man has proactively implemented policy that would see executives forfeit any incentive compensation if there was any misconduct or misstatement of financial figures.
Hedge Fund Incentives will be Increasingly Structured Moving Forward
The changes at the Man Group are far from unique in the hedge fund industry. While those working for hedge funds will certainly remain in the top tiers of compensation, their incentive pay will certainly be more closely linked to shareholder and investor returns moving forward. It has simply become unconscionable for executives and employees to be seen walking away with huge pay packets, while on the other hand, funds post negative returns for their investors and see fee revenue fall for their shareholders. These changes are not only important to regain the confidence of investors, but the public at large.