Insurance firms in Asia will probably have to restructure their remuneration packages to retain the best investment talent and expand into alternative investments and third-party asset management, heard delegates at AsianInvestor’s Insurance Investment Forum in Hong Kong last week. Indeed, they are already seen to be making changes, given fierce hiring competition across financial services.
Base salaries stagnated for a while, but more recently there have been signs of change across the investment industry, which is also affecting insurers, said Greg Kuczaj, Asia-Pacific head of global financial services at Willis Towers Watson. Hence, he noted in his presentation, “we've seen a holistic change in how people are compensating their investment staff".
Remuneration reviews are being seen in some of the new business areas that insurers are expanding into, namely alternatives and managing assets for third parties.
Everyone is looking for expertise in alternative skills set or client-facing capability, Kuczaj said, noting strong demand from insurers and other asset owners, as well as fund managers. “The change in investment strategies affects the change in human capital,” he added.
General-account and third-party asset managers at insurance companies are already remunerated differently, said Kuczaj, but there are also differences between them and traditional fund houses.
For example, as investment staff move up their career path, they are more likely to receive more long-term incentives at a unit that manages external client money than they would running an insurer's general-account assets (see figure 1 below). But these third-party investment staff would have designs mirroring those of traditional asset managers, who currently tend to get paid more (see figure 2 below).
In the alternatives space, the first thing to do to attract talent is to understand how the alternative asset managers are paying, Kuczaj said. And the formula they generally involves a base salary plus an annual incentive and a long-term component.
The annual incentive plan often involves a discretionary bonus applying a “balanced scorecard approach”, with elements including investment performance, operations, team work and strategic business priorities, Kuczaj noted.
But it is in the long-term incentive component where most of the money is sitting. That includes a carried interest plan (a share of the profits of an investment paid to the manager in excess of the amount that the manager contributes to the partnership), co-investment plan and traditional long-term investment plan (that is, stock options and performance payments in cash or shares).
The question facing insurance leadership teams and HR departments is the extent to which they would be willing to do things differently for different people, by segmenting the business to attract the right talent, Kuczaj said. He pointed out that such a remuneration overhaul might go against company principles designed for consistency and standardisation.
But the good sign is that “we absolutely are seeing the trend [where] finally people in the insurance industry say that these people are different and [that] they are willing to do different things with different people,” he said.
Short-term vs long-term horizon
Philip Cheng, an adjunct associate professor at the Hong Kong University of Science and Technology and a former Taiwan CIO at US insurer MetLife, agreed there was a dilemma that insurers must address over pay.
On the sidelines of the forum he told AsianInvestor: “What really matters to chief investment officers [at insurance companies] is the structure of remuneration and the way to measure investment performance and contribution.”
For example, a CIO may get a big bonus if he or she reaps high returns within a short time frame, say less than a year, which might however hurt the long-term performance of the portfolio. In contrast, more disciplined CIOs who stick with longer-term investment objectives and adhere to stricter risk management controls could get paid less due to poorer performances during their tenure, said Cheng.
“But this dilemma is indeed a difficult issue to address,” he added. It requires board-level decision makers focused on remuneration to really understand the investment portfolio and management.
And they need to be able to differentiate between cases of long-term investment adherence and poor investment capability, said Cheng, as well as the difference between short-term profit-driven motivation and true strong investment capability.