Incentive Considerations for Investment and Wealth Managers – On Demand Reward Management Solutions

‘The Incentive solutions developed by Fishtank create a critical link between individual action and financial/business performance, and ultimately reward.’

Well before the introduction of regulatory remuneration rules (including UCITS V, AIFMD, etc.) the Fishtank client community wanted a means where the transparency created from our Analytic Solutions could be acted upon to achieve direct and immediate change.

The development of our Reward module created a powerful solution to this challenge.

The analytical intelligence captured by Fishtank, combined with the Reward Management capabilities, has created a powerful and proven method for Executive teams to direct (and redirect) the client and product strategies of their businesses.

Funding and Allocation

Two key areas of discussion when clients start examining Sales Reward Solutions are usually Funding and Allocation.

Funding is always hot topic as it drives the pool of funds available to pay sales bonuses.  Increased regulatory attention, and binding announcements (eg. CRD IV and UCITS V), have also now dramatically introduced increased the urgency and compliance obligations associated with this topic.

Over the past 5-10 years the driver of the bonus pool has shifted dramatically from a percentage of total management fee revenues (or general bonus pools), to plans that look to isolate and reward the actual value created by sales.  A key reason for this was historical bonus plans that had become stale– with established sales guys happily picking up very large annual bonuses (based on a percentage of total assets, or heavy trailers) but not really doing any work or making new sales!

Capping concepts introduced (and in a number of cases still being considered), throughout various regulatory jurisdictions are challenging  Investment and Wealth Management organisations to reassess levels of fixed pay for regulated staff and how such fixed pay should be structured.  Variable fixed pay models is emerging as an approach Remuneration Committees and Senior HR/ Remuneration Executives are keen to explore, effectively setting fixed pay each year.

Various techniques exist to align sales effect to on-going value creation, but the preferred driver is to isolate the Net Revenue earned from the accumulated inflows and outflows in any given sales year.  At Fisthank we commonly refer to this as ‘Net New Annualised Revenue (NNAR)’.

Supporting this NNAR bonus earning stream will generally be a trailer (or legacy) fee based on the revenues earned off the total book of assets .

The market standard is about 15% of the Net New Revenue from each current sales year, and between 1-2 % of Revenue from Assets as an ongoing legacy/ trailer payment.

Each Asset Management business will have its own ‘unique characteristics’ in terms of product concentrations and average margins earned.  Arriving at a suitable formulae of rates is achieved relatively quickly through the modelling of various scenarios.  One of the common exercises here is to model rates and features of any proposed new plan to reward profile from the past few years – to ensure they are reasonable.

Allocation is the secondary topic, and as you would expect deals with how the bonus pool determined above should be distributed.

This area generally comes down to the Sales Culture that organisations want to promote/ maintain.  For example some Sales Heads have a preference for a team based approach, in contrast to a more individual focus.  Where team based approaches are employed, sub pools are very common at a team level, and country level.

Fishtank provides rich and  flexible functionality to customise the Sales Reward Design within the client ‘s specific requirements (e.g. corporate culture, product strategy, market volatility, new joiners etc.).

The most common areas where ‘customisation’ occurs are: ‘Client Sharing’, ‘Pooling‘, ‘Offset‘ treatment, ‘Clawback‘, Use of Specific Rates (eg. Country and/or Product level), and ‘Capping‘.

One of the key criteria to keep in mind with allocation,  is ensuring that a logical nexus is maintained between the Sales persons efforts and the bonus they are likely to earn.

High performing Sales people become very de-motivated when they feel they are not getting a just reward for their efforts.   Within this debate is the issue of how much the bonus calculation should be hard-wired verses how much should be discretionary.  No hard and fast rules however – again comes down to what the organisation and sales heads are looking to achieve.

Reward Design