News
FOCUS - Summer 2003
Remuneration based on composites?
Industry comment by Darren Crowley, Head of Performance Management, Pictet Asset Management
Based on the assumption that the main product Asset Managers sell is investment performance - surely one of the best ways to remunerate the fund managers responsible is based on the excess performance they generate against the risks they take.
Immediately questions arise, for instance, how do you measure managers consistently? Over what period? How do you adjust for risk? What is the remuneration scale? Arithmetic or geometric excess calculation? etc. In this short article I do not propose to answer these questions because each asset manager is structured differently and offers different products, but I do propose to put forward the case for using a risk adjusted excess return of verified Performance Presentation Standard (PPS) composites as an option for providing a consistent basis for transparently measuring fund managers.
Performance Presentation Standard composites are used by a firm to market its investment performance to the global community. Composites are structured to provide clients with an accurate, fair and transparent measure of the investment returns provided by the company. Portfolios of similar Investment Mandates will be grouped together to make a composite and normally they will be managed consistently by the same fund manager or team. I believe it is a positive message to show that we pay our mangers more for beating the client's investment benchmarks. Linking composites to pay will also focus attention on composite construction and the monthly results will generate significant interest. Also it requires the performance team to strictly comply to the predefined and disclosed composite rules. In addition, being verified by independent auditors will provide internal and external confidence in the composite calculations used to remunerate. Lastly companies put significant resources aside to become GIPS compliant so why not utilise the composite results for another very important purpose.
Of course other factors should also be taken into consideration, for instance, you may also wish to reward based on the dispersion between accounts in a composite, thus providing an incentive for managers who produce consistent investment returns. Also you could remunerate based on peer group rankings if you find a suitable peer group to measure your products against.
Whatever measure you use, I would suggest it is simple to understand, easy to calculate, check and report on, and most importantly, be fair and consistent. There are even some composite software providers out there to help you!