Hedge Fund/Private Equity and Financial Services Compensation Report


As of the third quarter, Johnson Associates broadly projects a decline in incentive compensation across financial services. For major investment & commercial banking firms, incentive compensation is projected to decline significantly, with variation by business. Incentive compensation for the asset management industry is projected to be essentially unchanged year-over-year, with increases and decreases by firm and mix of business. Lack of economic recovery, varying impact of regulation both globally and regionally, business mix, and ongoing uncertainty in world markets are key 2011 incentive drivers.


• Challenging market environment reduces full year expectations
– Economic recovery sluggish and uncertain
– Ongoing global issues impact stability and add uncertainty to world markets
– Broad economic concerns, market declines, and layoff announcements reduce employee incentive expectations

As Hedge Funds Dive Into Private Equity, Tiger Global Leads The Way

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• Expect intense political pressure around compensation with declining financials
– Public spotlight on compensation intensifies again with Occupy Wall Street type protests
– Proxy executive compensation constrained by poor results, regulatory pressures, and public optics
– Large deferrals and formulas / commission plans limit flexibility and put pressure on compensation ratios

• Asset management and alternatives businesses generally stable, but expectations moderated on challenging market conditions
– AUM levels decline from market depreciation and difficult asset gathering environment
– Low interest rates continue to hinder fees, with varying firm performance by mix of business
– Investor confidences erodes as political uncertainty and economic concerns weigh on market sentiment

• Expect headwinds for investment and commercial banking over remainder of 2011
– Positive momentum from solid first half advisory and underwriting activity reverses course as activity slows
– Poor trading results in both equities and fixed income, somewhat masked by positive accounting charges on firm credit spreads
– Retail and commercial banking generally flat as significantly reduced credit costs offset by weaker fundamentals
– Layoffs as business not as robust as expected and regulations constrain certain business activities

• Law of unintended consequences; early impact of regulatory changes becomes apparent
– Harsh consequences for errors can create disincentive to report problems and lead to larger losses (e.g., trader fraud)
– Years of heavy deferrals create challenges in down year (large fixed cost limits flexibility in compensation accruals)
– Significant cost of regulatory demands with small positive impact

*Caveat: Assumes turbulent market conditions don’t lead to 2008 type meltdown

Full document embedded below:Q3 2011 Comp est

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