Compensation in the Asset Management Industry

Stewart: Today we're talking about compensation. Who doesn't want to talk about compensation? Or do you want to call it rewards as our guest does?

Stewart: My name is Stewart Foley, I'm your host of the Insurance AUM Journal podcast, joined by Keith Robinson, Managing Partner of the Focus Consulting Group.

Stewart: Keith, welcome.

Keith: Thank you Stewart, glad to be here.

Stewart: It is good to have you, my friend. This is a hot topic, everybody wants to talk about comp, everybody wants to see comp surveys. Love, love, love to talk about comp, but you don't necessarily want to call it comp, why do you call this rewards and not compensation?

Keith: This is an interesting time of year to have this conversation, Stewart, because many organizations are paying the bonus, which is a big part of total compensation for most investment professionals. So we call it rewards because frankly, cash is interesting, but cash isn't sticky. And what do I mean by that? Well, what I mean by that is there are other reasons why you come to an organization and why you stay at an organization. And if we only talk about cash, we're leaving a whole big part of that conversation out, the intrinsic rewards that are equally as important as cash, but very rarely get viewed when you design a total rewards package.

Keith: So while comp is important, we know that compensation is only a portion of the story. So we use the word total rewards to not only frame base and bonus, and maybe long-term incentive, but we also want to get at the culture, we want to get at feedback, development, all the other elements that are intrinsic to how we grow and develop our careers over time, that are very, very valuable that most organizations don't overlook because it's sort of like the water that the fish are swimming in.

Stewart: It's interesting, not many people do what you do. So for those of our audience that's never heard of Focus Consulting Group, what is it that you do?

Keith: Probably the easiest way to frame this Stewart, is we do everything talent. And so what do I mean by that? In the investment industry, and this is the only industry we work in, so asset managers, wealth managers, you know, anybody that's managing money. It doesn't matter if they're inside an insurance company or not, we work with them. Why? Because, we all came from there. We were either portfolio managers or on the operations side or on the sales and marketing side. I happened to be on the talent side, right, on the people side of the business for more years than I care to mention here. But that's what we do, we're actually foundationally built out of a curiosity about culture.

Keith: So we do culture work. And what's interesting is, our founder, Jim Ware, who I met by the way, at Allstate Insurance, when he and I were both in the investment department there. Jim left Allstate to found Focus Consulting because he had a curiosity about the power of culture inside an organization. And more directly the power of culture inside an investment organization, so we measure culture. We also measure leadership. We develop leadership.

Keith: One of the unique things that we bring is we also have two former CIOs and portfolio managers in our stable of professionals and they actually help investment managers get better at process. There really isn't any other firm I know that actually from the inside out has a full understanding of investment process and can help improve that. So that is sort of the backdrop, culture and strategy. And then we do everything that supports that, which is talent related or investment related.

Stewart: It's interesting. You mentioned our friends at the Allstate investments team, they're good friends of ours. We've got a lot of friends there and give those guys a quick shout out. So you talk about total rewards package. How do you measure whether a compensation plan is effective or not?

Keith: It's a great question and it's a tough question to answer mainly because it's so personal and so individual. So we're looking to tick three boxes whenever we go and work inside an organization. Fair, transparent and simple. We want to look and see if the rewards plan measures up to those things. So let's take them apart for a moment. Fairness. Now, fairness like beauty is in the eyes of the holder. Now having actually developed plans as part of a management team, I can always say, yeah, this is fair. That's in the view of management and that might work for management, but it doesn't always work for the person being rewarded by the plan. So that's the view that we want to take, is as you're being rewarded by the plan, do you feel you're being fairly compensated? That doesn't mean you're making the most money. I mean, we all would like to make more money, but the reality is are you getting paid for the value you bring to the organization? And that's really what we want to get after.

Keith: The next one is transparency. So what we know is a transparent plan creates trust. If I understand, I'm going to date myself here Stewart, the old if-then statements from basic programming a thousand years ago, if I do this, then I get that. If I can understand the if-then statements of the compensation program, then likely I'm going to think it's fair, assuming it's administered fairly. So transparency is important. We've worked with quant shops, for example, that build these plans that even the quants can't remember the math that they created to kick out what the final amount is going to be.

Stewart: A black box that nobody can figure out, right?

Keith: It's amazing, right? Especially when we're in an industry where math really rules and dictates so much of what we do. They have a black box compensation program, and by the way, you can have a subjective compensation program without it being black box, but that requires a lot more communication, and sort of that third measure, simplicity. Keep something that is simple and elegant and that's going to get you there. Even if it's more subjectively oriented, it can still be simple, as long as they understand the if-then statement and the final output.

Keith: We are so blessed in this industry, Stewart, that, you know, we make a lot of money, no question about that. And what's interesting is it becomes more an idea of keeping score than it does actually of necessarily I need $600,000 a year to live. We don't. So that's why we look at rewards as opposed to just cash and bonus, you know, base and bonus, because we recognize that there's a lot of other things in how you administer a plan, how you provide feedback and so on, that really, really matter in how a plan is delivered and used inside an organization.

Stewart: So with regard to the key elements of intrinsic rewards, you mentioned culture is a big deal, right? Some shops keep people a long time, some shops seem to not so much. How do you break down the key elements of intrinsic rewards?

Keith: So think of it this way. The extrinsic are all the things that are outside of ourselves, so my base salary, my bonus, my longterm incentive, a promotion. Those are extrinsic rewards. And make the mistake, those can be motivating, but they're only motivating to a point. So one of the things that we discovered based on the writings of Dan Pink in his book Drive, and I would recommend that book to all of our listeners here, is there are other things that motivate knowledge workers. Once you get above a certain economic level, mastery, autonomy and purpose are key motivators to knowledge workers, people who use their brains for a living. So it fits very well with our industry, right? And mastery is that motivator around continuous improvement and getting better.

Keith: What we know from our culture work is that continuous improvement and excellence typically our core values within any investment team, they're always looking for an edge. So developing your talent is another way that we think of rewards, is helped me get better at what I do, help me master my craft. Autonomy, we're learning a lot about autonomy in the pandemic, right? Autonomy is giving people the flexibility in their freedom to practice their craft the way they want to. So if I have a certain investment style, I don't want to be handcuffed necessarily to somebody else's style, I want to do things sort of the way I want to do them. We always like to say you never want Picasso to paint by numbers. It's the same thing with investment professionals.

Keith: And then finally, purpose. Doing something that has meaning both individually for me, but collectively for our clients, in your case our insureds, and so on. And that's important to investors as well. So when we think of rewards, we think of both the extrinsic piece and the intrinsic piece around mastery, autonomy and purpose. So that's development feedback, autonomy, all those pieces. And we measure those and whenever we build a rewards plan, we want to ensure that those are as strong as all of the other incentives.

Stewart: I've always heard that telling somebody they're doing a good job has no hard dollar cost, but makes a big difference in how that person feels about working where they work. I don't know, is that true or urban legend?

Keith: No, you hit the nail right on the head, and there's so much science behind that story. And it's interesting because we say we work in an ADD industry and that is an appreciation deficit disorder industry. We are very much of what-have-you-done-for- me-lately kind of industry and many investment professionals have that mindset. There's nothing wrong with that mindset, but remember exactly what you said. You're giving away a free option because to appreciate somebody for doing their job, to appreciate somebody for doing a good job, actually appreciation, Stewart, can be as simple as just paying attention. When somebody's speaking to you, making eye contact, nodding, repeating back what you heard, paraphrasing, those are all forms of appreciation.

Keith: And the science is real. If you look at some of the research by Dr. John Gottman, who's done a lot of research in this, he will tell you a five to one ratio, five appreciations for every one criticism will send people over the moon as far as motivation, retention and really doing a better job. So it's a powerful, powerful motivator. We measure that as well when we do rewards plans, how well is that going.

Stewart: I love that. So when you think about extrinsic compensation or rewards, what are the key elements there?

Keith: Yeah. So for us, it's about making sure that you're paying for value. There's a lot of talk and there's a lot of research out there, market information. You know, data is interesting because data can tell you kind of what you want to know. And we have to be wary of confirmation bias and a whole host of other biases that are out there, but recognize when we look at the extrinsic pieces, base, bonus, long-term incentive. First thing we want to do is what we call a sanity check. So we want to measure, we want to look at how well are we paying relative to the market. And here's the difference. We don't want the market dictating what we pay, but we want to make sure we're in the game.

Stewart: Right.

Keith: You know, my partner likes to describe it as a bowling alley with the bumpers up for the kids, you to make sure the ball doesn't go into the gutter. And that's really what market data is all about, is ensuring that the ball doesn't go in the gutter. So we use that as a test, kind of a sanity check. Beyond that, then it's arriving at what we call the value equation. So what is that role's value to the organization? That helps us get at base and bonus, because the bonus, if it's flexible, gives then management the opportunity to say, Wow, that was a strike, or, you left us, what is it, seven, 10 split or whatever it is, and you didn't get it.

Keith: So that allows you then some flexibility in the extrinsic piece of I'm paying an appropriate base salary based on our philosophical belief as an organization, and I have flexibility in the bonus to pay up or down, depending upon how well the person contributes. Alpha, for example, contributes as a team member, contributes as an idea generator as an economist, whatever the measure of success is, as well as the measurement around how well we're doing as a team, as the collective.

Stewart: Yeah. And I mean, I think, you know, it goes back to sales as well, right? I mean, you've certainly got incentives that need to line up there too. And it is score keeping, right? It's not keeping a roof over your head at some point, it's, you know, I think this business, the scoreboard, is what's your AUM and what'd you make last year. And at the end of the day, you know, there's certainly more to it than that, right? So it's very, very interesting. And I think I've always heard too, that you get what you incent. And you need to be careful and not necessarily careful, thoughtful, about how this stuff is put together.

Stewart: So are there other considerations for rewards that we haven't covered?

Keith: Yeah, I would start with, I think to your point about you get what you incent. So when we talked about transparency, we always start with a philosophy of rewards. Like most organizations that are investing have an investment philosophy where deep, global intrinsic value, it just helps us understand how the money is going to be cared for. Same thing with rewards. You should always have a well-stated and consistent rewards philosophy for how you're rewarding your talent. That matters in, one, retaining talent and attracting talent. Because if I am somebody who really wants to be rewarded, kind of eat what I kill, and I come to more of a team-oriented philosophy, I'm probably not going to fit. So you want to make sure that that philosophy is out there. It's a great recruiting tool, it's also a great retention tool. So we would say have a strong rewards philosophy like you have a strong investment philosophy.

Keith: The other thing we like to talk about is, and you use this term, so I'll go back to it, is compensation is often a relative game, which is why if you only go with extrinsic, you're not going to see the whole picture. And if you'll indulge me with a short story. I was doing compensation for a hedge fund, we were paying out bonuses. We paid a portfolio manager a $14 million bonus. True story. Not bad, $14 million. That actually gained us about two minutes worth of happiness until the portfolio manager went next door to another portfolio manager's office who got, guess what, a $15 million bonus.

Keith: Now we had a relative problem on our hands. So it doesn't matter the amount, it matters, all the elements that create how that amount gets determined.

Stewart: That is a problem that we have not experienced yet at Insurance AUM Journal.

Stewart: So what are the best plans that you've seen? And you've seen a lot of them. I mean, this isn't your first day and Focus has been around a long time. So can you give us some general, I know you can't get specific, but what are the best kind of plans that you've seen so far?

Keith: Yeah, and we have been doing this for awhile. I mean, I've been doing compensation work for well over 20 years on the inside as well as the outside, and I can tell you what doesn't work, but let's talk about what does work. And really what fits best is the compensation plan and actually the total rewards plan. So the intrinsic and extrinsic elements that support the firm's culture, that support the firm's strategy, that help people understand why and how they got paid, and that are part of the value system within any team or any framework of an organization. So the short answer is any program that is bespoke to that team or to that organization, that's the best program.

Stewart: That's interesting. When you get into these deals and you're on an assignment, you're talking with the senior management, I'm sure. Are you also talking to the, what I would refer to as the rank and file or the people who make the donuts. Particularly they're younger, I teach and I'm always sensitive to this one and wait till my ending surprise question, you'll see where this is going. Are they involved at all? Do you get data points from them? I mean, in today's world, everybody talks about people coming out of college are different than they used to be, blah, blah, blah. I do think that based on my experience, there is a difference in the value system that some folks that are newer coming out of college are than some of the folks that are more our age, with a little more gray hair. So do you deal with that at all?

Keith: We do. And I go back to our three principles, the first one being fairness in the eyes of the person being rewarded by the system, not by management. So that really means that we need to go and talk to each of the people that are being rewarded by the system. So we do it a couple of ways. One, we use a survey to help us understand the mindset, and then we follow up with focus groups. And everybody's invited to a focus group, they don't have to come, but we would say if you're going to come to a focus group, no passengers and no prisoners. Meaning come and be active and give us your ideas and your thoughts. What's working in the current system, what is missing, what is not working for you. And so be very self focused when you're in the focus group.

Keith: So that really helps us get a good sense of the psyche of the organization and the psyche of the talent when we do it. The reason we're very inclusive in our approach, Stewart, is we know the minute you start messing around with people's pay, you're messing around with their security, and people get fearful. The only way to help them get past their fear by the way, is to get them involved in the conversation. We make it very clear, they don't have decision rights, but they have input rights to however we're going to design the full of reward system for them. And typically what we find is in addition to maybe pay is a little lighter, maybe it's not, sometimes we find out pay is appropriate, but it's how the pay is administered that's the problem. It could be performance management or some other approach that's going on within the organization. And that really helps us understand.

Stewart: Yeah. I mean, you don't want to have a surprise in the bonus. If you want a surprise, you want an upside surprise, right? But if there's an issue, you should have known that prior to the bonus conversation.

Stewart: So here comes the surprise question. If you listen to our podcast, and those people who are subscribed, thank you first of all. And everybody gets to hear this question, so here we go. You and I are about, we're in the vicinity of the same age, so this is going to take you back a little bit. So your graduation day of your undergraduate institution, and there you are. Now, you may have had a big night the night before, never know. So there you are, you're in your cap, you're in your gown, you're looking good. And they call your name and you walk across the stage, the president of the college or university shakes your hand, hands you your diploma, there's a quick photo and a way you go. And you walk down the stairs and you run into Keith Robinson today. What do you tell your 21 year old self?

Keith: What a great question. And it is related to rewards, by the way. So what I would tell my 21 year old self is, one, find your genius. Find that thing with which you were meant to do. And I say, I'm a slow learner, it only took me 20 something years to find my genius and to find and pursue that, which is what I do now. So find your genius. And by the way, don't worry about the money. If you're working in your genius, the money will come and it will come when you need the money to come.

Keith: So that's probably what I would tell my 21 year old self, and I have five kids, all of which the last is just about to graduate. And I tell them all the same thing. If you're doing what you love, and you know, this is sort of an old saying, you never work a day in your life. And I really didn't discover that until I'd been in the industry for a little over 20 years and I found what I really, really love and I get to do it about 70% of the time. That matters. That really, really matters.

Stewart: Yeah, it does, and that's great advice. I really appreciate you coming on and talking about something that is near and dear to the hearts of our audience, I can assure you.

Stewart: So thanks, Keith, I appreciate you being on.

Keith: My pleasure, Stewart. Great to see you.

Stewart: Keith Robinson, Managing Partner of Focus consulting Group.

Stewart: We appreciate you listening to the Insurance AUM Journal podcast. You can follow us on all the major platforms. If you have ideas for a podcast, please send us an email at podcast@insuranceaum.com.

Stewart: My name is Stewart Foley, and this is the Insurance AUM Journal podcast.