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The in-house investment team: right people, roles, rewards

Good people are at the core of any successful organisation, and that is true for asset owners. Global chief investment officer of Towers Watson, Craig Baker discusses how designing and implementing structures that attract the right people in the right roles can unlock long-term sustainable advantages that the right investment team can offer.


It is a truism that good people are at the core of a successful organisation and it is no truer than in the asset-owner world that is characterised by heavy competition for the talent needed to generate superior investment returns.

It is also an environment where complex global operating models are required to maximise those returns. So the challenge for asset owners now is to design and implement global structures that attract, retain and develop the best people possible.  Crucially, this means the right people for their organisations, allied to the right rewards, working in the right roles.

So who are the right people, what environment do they need in order to perform best, and to what extent can this be created through reward structures? What describes the critical roles?

Much has been written about the characteristics that define the best investors in the asset management industry and, while there are similarities in the asset-owner world, the context is different and so is the debate.

At the heart of the matter is the difference in the mission and goals between asset owners and asset managers and the different skills and roles required to fulfil these. A critical aspect is in risk management where the asset owner has to master deeper and longer-term risk factors. Another obvious example is the skills gap between direct investing and choosing external managers, although this is diminishing as asset owners do more direct and co-investment.

Many of the largest global asset owners are charged with safeguarding and growing public funds (whether pensions or national resources) and as such fall under a political or public scrutiny that private sector asset managers do not. This can make it hard to attract the most highly paid talent because of entrenched pay scales and the justification that would be required for such elevated compensation, relative to norms.

Alignment is also a challenge for asset owners.

While the agency problems are fewer than under the traditional structure of outsourcing to asset managers, the tools available to improve alignment are restricted.

For asset managers, measures such as co-investment, employee ownership and performance fees, if structured correctly, can lead to improved alignment.

These options are not generally available to asset owners, and instead they may have to rely solely on carefully calibrated incentive pay in which long-term incentive plans will play a big part.

However, asset owners are culturally well placed to implement these, and because they have strong alignment potential, they should also benefit the organisation. The employee wants a ‘pay for performance’ deal, the organisation, at least in theory, gets ‘performance from pay’.

Among the recruitment challenges is being located outside the traditional financial centres, but many asset owners today have overcome this by applying the popularly captioned “green, grey, and grounded” strategy that Bachher and Monk have described.

The green employees (early career stage) can have greater responsibility and development at large asset owners where they can develop as generalists, whilst only sacrificing a small pay discrepancy to the private sector.

The grey employees can step out of the more cut-throat private arena, give back, mentor the green, and avoid the stresses of competing for capital in the fundraising cycle that is critical to asset manager success.

The grounded employees are location orientated, whether that is a tie or a desire.

This approach to recruitment can build a good base of talent but should be fused with nuanced reward packages, which combine both financial and non-financial rewards and incentives.

In purely monetary terms, compensation needs to align pay with performance.

It should reward appropriate risk taking (not too much nor too little) and align performance with the strategic goals and time horizon of the fund.

A compensation package should have a balance between current and deferred pay. Given investment performance volatility, the deferred, long-term element should be central to the way asset owners remunerate their people. Crucially though, deferred compensation needs to find a balance between being fairly assessed, which gets easier as the assessment period increases, with incentives that motivate people each working day, which becomes harder over that longer time period.

There are many traps lurking including: complexity in design that frustrates and demotivates; asymmetric pay structures that could lead to inappropriate risk taking; too much rough justice in rewarding lucky outcomes not skilful outcomes. Perhaps the biggest trap is imitating the asset managers’ incentive designs that are often over-leveraged to luck and short-termism.

Having remuneration structures that attract and retain talent is one thing, but asset owners need to find the right talent for their organisation while facing the natural temptation to hire ‘star performers’ who have been successful elsewhere.

Groysberg, Nanda and Nohria argue that “in business, the only viable strategy is to recruit good people, develop them, and retain as many of the [resultant] stars as possible”.

To avoid assuming that what works in one organisation translates across to another, asset owners need recruitment practices that benchmark potential employees to a very specific set of desirable traits: skills and experience of course, but values and attitudes too.

These practices are likely to reflect the overall mission, align with the organisation’s cultural norms and fill gaps in expertise. Diversity has many valuable dimensions to asset owners in the extreme competition for returns. The edge mostly comes from focusing on long-term sustainable returns ahead of exploiting short-term market inefficiencies, as well as translating themes, ideas and asset trends into practical decisions and portfolios.

Another consideration for asset owners is to remain aware of developments that will shape the recruitment marketplace, arguably the most powerful of which is the emergence of the so-called ‘Millennials’ generation.

This presages a fundamental shift in the workforce.

According to research, by 2020 nearly 50 per cent of the workforce will be Millennials, rising to roughly 75 per cent by 2025.

Millennials are seen as knowledge workers, who seek employability and a career lattice (not ladder).  They seek motivation, meaning, and flexibility, and have a significant social consciousness.  They are technology natives working in a fast-moving world who thrive in a results-oriented work environment.

As this new group comes to dominate the workplace, the best employers will adapt so as to take advantage of what they offer, for example delivering more flexibility and responsibility in the employee value proposition.

There are examples of this in what Reid Hoffman, co-founder of LinkedIn, describes as ‘The Alliance’ which forges a mutually beneficial deal with explicit terms between the employee and their organisation.

We see some asset owners evolve the roles that their people play to contribute more fully to the generation of the best ideas. The ‘one portfolio approach’ adopted by a rising number of asset owners uses roles that have a line of sight across the whole investment spectrum. The employee often values the greater empowerment delivered in network styles of operating in preference to hierarchy – again evident in certain organisations.

The workforce in 10 years’ time offers many challenges to today’s thinking, but simultaneously it offers changes that asset owners are well placed to take advantage of.

Given the employment currencies of knowledge and transferable skills, there will be a far wider talent pool for asset owners to consider than the traditional competition with asset managers. Asset owners, particularly public funds, also give a direct opportunity for people to exercise their social consciousness.

Indeed, reward itself will also take on a more explicitly non-monetary element.

In ‘Drive: The Surprising Truth About What Motivates Us’, Dan Pink argues that, in a knowledge-based firm, motivation is best realised through giving workers autonomy, mastery and purpose.  These three levers therefore can be used by asset owners as reward elements to attract the right people.

Autonomy is often easier in an asset owner context than at a very large institutional asset manager. The evidence is seen in the considerable extramural activities that many leaders of asset owners pursue.

Mastery could be found through training, professional development, idea generation, challenge and debate; the full spectrum from generalist to specialist. Clearly here, mastery should also offer powerful fuel for fund performance.

Purpose could link closely to the social conscious of the new workforce which publicly sponsored funds can satisfy, especially those with agendas of direct development investing or with committed environmental, social and governance (ESG) policies. The most interesting opportunities for sustainable investing lie with the asset owners.

There is a war for talent and Groysberg, Nanda and Nohria conclude that: “the first step in winning the war…is not to hire stars but to grow them”.

The talent pool is changing and asset owners are well placed to take advantage of this.  However only those that best understand and capture future trends in the workforce, secure the talent that is right for them, and make it work in the right roles in line with their objectives, will realise the long-term sustainable advantages that the right investment team can offer.

Craig Baker is global chief investment Officer at Towers Watson