Press

Institutions Up Pay as Talent Well Runs Dry

FUNDfire, July 17, 2007

By Whitney Kvasager

Institutional investors are struggling to find investment talent to fill new or vacated executive positions, recruiters say. They disagree why there are so few candidates, but agree that the dearth is driving up compensation to entice the few candidates who do exist and making searches longer and more difficult.

“I think everybody’s pretty worried about it. They’re wondering where the next generation of leaders is going to come from,” says Mary Hobson, executive v.p. of EFL Associates. “I think you’re going to see a lot more people promoted internally and moving from government agencies into retirement systems.”

Hobson says she’s currently doing about eight searches, for executive directors, CIOs, asset class heads and a public equities director. That’s more than the year before, though she couldn’t say by how much. Hobson chalks up the activity to more executives leaving for earlier retirement. She lists the Pennsylvania State Employees’ Retirement System, the San Joaquin County Employees’ Retirement Association, the Kansas Public Employees Retirement System and the Texas Employees Retirement System as public plans currently seeking investment staff. She says her firm is about to conclude an executive search for Colorado’s public employee retirement association.

The retirement system of Orange County, CA and the state of New Hampshire are currently searching for CIOs.

“There’s really just lots and lots of movement, because people are eligible for retirement,” she says. “And why wouldn’t they retire? It’s just kind of natural for these people. They’re young enough to keep working, but they’re choosing to retire.”

Alvin Spector, partner at executive search firm Lantern Partners, has also had more clients. He says more institutions are creating new jobs to oversee new allocations to riskier asset classes and then trying, unsuccessfully, to fill those positions themselves. He says the average search this year takes 90 days – about two months longer than an average search took a year ago.

“Clients try to find someone, but they can’t and so they turn to us,” he says. “That’s why we are all far busier now than we were last year. Every recruiter is busier.”

But Spector does not think early retirement is the cause of too few candidates for too many jobs. He chalks the situation up to the number of people who have been hired away by hedge funds, and the failure of the institutional industry to cultivate their replacements.

“There is generally a lack of talent, and it comes from hedge fund companies that basically absorbed a lot more of the talent that might have otherwise been available,” Spector says. “In the investment management industry, across the board, be it a consultant or analyst, there’s a shrinking pool of talent. There needs to be a way of attracting, building and training talent from recent graduates and bringing them on board.”

One way institutions have done so, consultants agreed, is to raise compensation.
“To me, the startling part of [the lack of talent] is the impact it has had on compensation. We’ve seen pay shoot up,” says David Morris, senior partner at recruiting firm Heidrick & Struggles. “There’s a huge shift in compensation. It’s suggestive of too much demand and not enough supply.”

Some of the most dramatic increases are at public pensions, a number of which have either upped top executives’ compensation or said they are considering doing so.

Last December the $109 billion Texas Teacher Retirement System changed its compensation system, allowing for the first time its newly-hired CIO to take home up to 75% of his base pay in bonuses. His annual salary is $402,000 with the potential to earn another $301,500 if the plan beats its benchmark by $600 million. The Los Angeles County Employees Retirement Association is considering a 40% pay increase for investment staff, which would place them among the highest paid public workers in the region.

Trustees of Maryland’s $35.4 billion State Retirement and Pension System have seen their recruitment efforts harmed after not offering competitive compensation. Executive director Dean Kenderdine says that after former CIO Steve Huber left last year to join T. Rowe Price, trustees couldn’t find anyone to take accept the annual salary – $137,705 and no bonus. Kenderdine said in May that the board of trustees was developing a new compensation package. He did not return multiple phone calls to say if it was complete.

According to a Greenwich Associates study released last year, the average compensation for a public fund CIO was $128,500 in 2005, up from $117,100 in 2004. The mean salary for a CIO at a corporate plan with more than $5 billion was $229,200 in 2005 – $9,200 more than the year before.

Pay increases won’t be enough to compete with the private sector, says Rick Lannamann, vice chairman of search firm Spencer Stuart. He agrees there are more institutions looking for executive investment staff – his firm has turned down clients this year because of the onslaught. But he thinks those clients will simply have to settle for individuals with less experience than they might like.

“In some cases, people are learning on the job. They may be experienced in marketable securities and they are learning on the job about private equity and hedge funds,” he says. “And so we’ve seen a number of clients who will take brains and judgment over direct experience just because they’d rather have somebody really capable with a lot of on-the-job learning to do versus someone who was mediocre who might have had a bit more experience.”