Talent acquisition trends and regulations are driving deferred compensation and carried interest plans into uncharted territory
Executive pay is a hot and complex topic in the financial services industry. Once made public, a firm’s deferred compensation, share or carried interest plans can be scrutinised by the press, institutional shareholders and employees.
The disclosure of executive compensation can also get personal. It can say a lot about how senior management and shareholders value employees’ contributions. And – perhaps more telling – their own. For example, according to a Financial Times report, while more than 40% of shareholders voted against UK events and publishing group Informa’s plan to reduce the incentive criteria for its CEO and CFO, the company still implemented the proposal.
Besides AGM outcry another factor impacting executive compensation is continual regulatory change.
How are regulations impacting executive compensation?
Under the EU Undertakings for Collective Investment in Transferable Securities Directive (UCITS) and their Alternative Investment Fund Managers Directive (AIFMD), as well as the UK’s post-Brexit equivalent, the rules are bringing more financial services firms within the Capital Requirements Directive remit. This means executives must pay at least 50% of any deferred or non-deferred portions of their variable remuneration (including bonuses) into funds they or their firms manage.
This personal commitment gives fund investors confidence that managers are incentivised as material risk-takers in the financial instruments they manage. It also compensates for unforeseen losses of the sort experienced in the 2008 subprime mortgage crisis.
What is a fund-based deferral arrangement?
Asset management breeds a highly competitive recruitment environment. The top talent can demand significant – and often complex – remuneration packages.
Fund managers are often not content with “standard” remuneration components such as salary, cash bonus and equity awards. They typically expect to participate in and benefit from the funds or investments that they manage or support.
A fund-based deferral arrangement addresses this need and provides a mechanism to comply with regulatory deferral obligations. These sophisticated agreements can include a host of instruments, including units or shares, equivalent ownership interests, share-linked instruments and equivalent non-cash instruments relating to the funds.
Some HR departments handle a combination of these plans alongside carried interest structures if the firm has a private equity division. Third-party tax, legal and remuneration experts can act as an independent layer of compliance and employee communications for these plans.
In such cases, employee communications are business-critical. Best practice is to provide a platform or microsite with the latest information about deferred compensation and carried interest plans. Intertrust Group offers this one-stop-shop solution to clients.
Going public: private equity gears up for public scrutiny
Another development we are seeing is more private equity firms going public. Reasons for this include accessing evergreen capital and publicly committing to ESG transparency. But we believe the main driver could be a focus on capital gains tax on carried interest in certain markets, including the UK.
When these firms go public, their remuneration structures may change drastically. New share plans and their other remuneration and carry structures may also enter the public eye, open to scrutiny.
Millennial founders may also be concerned over how their public persona will be judged once their executive compensation is thrust into the public spotlight.
Rethinking talent acquisition and retention
The incentives tool box is now very different for both millennial fund managers and company founders. Hiring firms must realise that staff loyalty has changed significantly. The goalposts have been moved when it comes to talent acquisition and retention.
For example, more millennials and Gen Zs would leave their current employer within two years if given the opportunity (36% and 53% respectively), compared with 31% and 50% in 2020, according to Deloitte’s 2021 Millennial Survey. Moreover only 34% of millennials and 21% of Gen Zs say they plan to stay at least five years.
Company values also play a key role, with 44% of millennials and 49% of Gen Zs saying they are only prepared to work for companies that share their ethics.
These groups are also more likely to expect carried interest earlier in their careers than previous generations. This trend could have wider implications on firms’ ability to attract and retain new talent.
These workforce shifts present another layer of complexity, but also of opportunity, for companies developing their remuneration packages.