Hello and welcome to the Fides Weekly Update. Take a look at this week’s key trends, moves and developments in legal and compliance.
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1. Bonus shake-up for asset managers
In a bid to improve work culture within the investment industry, two of the UK’s top asset managers are re-evaluating bonus pay in their organisations.
Neil Woodford, head of investment at Woodford Investment Management, has announced that the 35 employees of Woodford Investment Management will not receive any further compensation above their fixed salary. Similarly, Daniel Godfrey, the former chief executive of the Investment Association, has plans to set up a new fund where the executives will not be paid bonuses.
These changes are rare to see in asset management, as it’s an industry that has always been well-known for paying out big bonuses to senior management. High performing fund managers and bosses are used to receiving millions of pounds each year in bonus pay. For example, Prudential fund manager Richard Woolnough has been paid over £30 million in bonuses over the last two years.
The financial sector has long struggled with short-termism, and many studies have found that performance-based pay has converse effect on their productivity and doesn’t foster the right long-term philosophy and employee motivation as it should.
CEO of Woodford Investment Management Craig Newman said “drawing on our experience of various bonus-led remuneration models, we concluded that bonuses are largely ineffective in influencing the right behaviours.’ Instead, Newman will increase their fixed salaries in order to compensate for bonuses. He argues that bonuses cannot act as a motivator and the expectation is already built in. Instead, they prove rather counter-productive, by encouraging opportunistic and selfish behaviour.
Fund manager pay has become increasingly criticised recently and the largest asset management houses are being accused of offering excessive windfalls. Not only has this been branded ineffective in improving performance, but a shift in investor mentality from active fund management to passive fund management indicates that institutions will be less likely to pay out such larges bonuses, as this form of compensation isn’t as common with passive fund managers.
A report by PricewaterhouseCoopers also claims that the pay of asset managers will come under further scrutiny as the industry grows and faces increased regulatory pressures. It expects that compensation will drop as a percentage of revenues from 45% in 2010 to 35% in 2020. The report also states that remuneration represents 60% of asset management’s total costs, which may be unsustainable should the industry face any future challenges, such as the potential fallout from Brexit.
2. Another magic circle firm to break lockstep for US hire
Last week, magic circle firm Allen & Overy (A&O) decided to break its lockstep to hire New York star performers. This takes place one year after the firm launched a discretionary bonus pool, and has created a trend amongst those entering the US marketplace.
It hasn’t been released for whom the lockstep was broken, but last month A&O carried out a five partner strong leveraged finance team hire in Manhattan, comprising of NY heavyweight Scott Zemser, who joined from White & Case; fellow W&C partners Alan Rockwell and Judah Frogel; Rajani Gupta from Proskauer Rose, and Todd Koretzky who was brought on board from Milbank, Tweed, Hadley & McCloy.
Last year, Freshfields Bruckhaus Deringer made the same decision to break their lockstep when hiring US high-yield partner Ward McKimm from Kirkland & Ellis. You could argue that Freshfields have been the most aggressive in their efforts to compete with leading US firms, but with A&O’s changes to their remuneration model, it’s clear that the firm are also serious about building a formidable US offering.
There have been a number of changes to partner remuneration models over the last few years, as UK firms have had to adjust locksteps, introduce ‘superpoints’ and provide discretionary bonus pools in order to compete with the profitability of US firms. However, when it comes to launching offices on the ground in the US, the home of the world’s elite and most profitable, firms have needed to make much more drastic changes to their business model if they expect to attract leading talent.
Linklaters and Clifford Chance have considered minor changes to their partner remuneration systems, with Linklaters proposing new gates to equity and Clifford Chance introducing ‘superpoints’, however, these additions are certainly not great enough to compete with the level of profitability they face in the US.
To read further on changes to partner remuneration models, take a look at our blog “Changing Lockstep: A review of partner remuneration in the UK”
Movers & Shakers of the week
A&O appoint new head of Asia practice
Stephen Miller is relocating from Allen & Overy’s London office to lead the firm’s Asia practice in Hong Kong
Dentons hires fifth Irwin Mitchell partner
Former Irwin Mitchell partner Simon Tweedle joins Dentons’ banking and finance practice in London, becoming the fifth Irwin Mitchell partner to leave the firm for Dentons in the last two weeks
Proskauer bolsters City finance offering with Reed Smith hire
Proskauer Rose has hired leveraged finance partner Ben Davis from Reed Smith in London
Mergers & Alliances
Addleshaw Goddard and Hunton & Williams stall merger talks due to political uncertainty