Variable compensation – specifically bonuses – in UK wealth management differs across the market. Base salaries for relationship managers and senior private bankers have risen somewhat in line with inflation and living costs but our research indicates bonuses and variable compensation have stayed flat or even dropped at many firms.
There are disparities in bonus structures – partly shaped by cost constraints, client retention priorities and generational shifts in hiring – and this piece sets out to compare the variable compensation bonus structures from a multitude of private banks and private client investment managers in London, identifying bonus payout trends.
We will take a closer look at the data using industry insights and market research to uncover the varied approaches firms have to their compensation structures and highlight how these models vary across the market. Our aim is also to understand whether there are underlying factors behind discretionary bonuses – and if these bonuses are even ‘discretionary’ – as well as if certain types of institutions are more likely to reward their staff in a certain way.
Historically, private client investment managers have leaned towards either a fully formulaic model or a hybrid model made up of various KPIs – but generally without a discretionary element. Our research suggests privately-owned private banks opt for a more formulaic structure, whereas retail and bulge-bracket banks tend to be more likely to use a discretionary payout.
Market trends have shown that, while basic salaries continue to rise gradually to keep pace with inflation and the cost of living, variable compensation remains largely stagnant or even decreasing at many companies using a discretionary structure.
Despite high demand for senior relationship managers, some organisations are opting to move away from discretionary bonuses and tie pay formulaically to performance metrics. These discretionary bonuses are not increasing, however, due to cost constraints and increased client retention – factors that firms often prioritise over bonuses.
Often, private client investment managers have lower costs and a more restricted product line than larger universal banks. Limited access to areas such as private markets, a smaller advisory footprint and significantly less infrastructure result in a lower cost-base, allowing for a more streamlined operation and the ability to reward performance more aggressively.
Boutique managers
Unlike traditional private or universal banks, boutique investment managers tend to offer higher variable compensation bound to net new money, revenue and performance, as their investment managers typically have much closer client relationships, making their client books more portable in the event of them leaving for competitor firms. As such, private investment management firms offer higher variable rewards in an effort to retain their best-performing staff.
Our research reveals the varied range of models, as described above. Particularly, almost a third of firms studied (29%) make use of strictly formulaic bonuses where payouts are derived from financial results or performance metrics. Conversely, 35% of the firms researched rely solely on discretionary bonuses, enabling flexibility and more managerial judgement. We found that 35% of firms either used a combination of formulaic and discretionary or only discretionary bonuses.
The balance of discretionary bonuses and the hybrid model indicates that firms still value measurable performance indicators, while some still reward less quantifiable contributions, such as internal collaboration and previous performance.
“Despite high demand for senior relationship managers, some organisations are opting to move away from discretionary bonuses and tie pay formulaically to performance metrics.
More than a third of bonus payouts were tied to ‘net new assets’, which highlights the importance of growth and client acquisition as vital drivers of variable financial compensation.”
When delving into how bonuses are calculated, we noted more than a third of payouts were tied to ‘net new assets’ (NNA), which highlights the importance of growth and client acquisition as vital drivers of variable financial compensation. By coordinating bonuses with NNA, firms are likely enticing employees to fixate on expanding the business and bring in new clients, intertwining growth with bonuses.
In our view, the increasing consolidation in the wealth management sector has a noticeable effect on compensation structures and business culture. Under private equity ownership, for example, firms can plan a three-to-five-year view. This means the focal point pivots towards driving revenue growth and EBITDA expansion, maximising exit value.
Generally, this translates to ambitious sales goals with compensation structures that reward short-term asset gathering instead of long-term client outcomes. Client preferences are then no longer at the forefront of firms’ concerns and the cultural dynamic may switch from one of stewardship and relationship-building to a more transactional, commercially focused approach. This could enhance incentives and, with the owners’ growth objectives, it may strain client relationships if decisions are seen to prioritise profitability over client-centric financial advice.
Performance considerations
Our research reveals that factoring performance from previous years within a bonus model was far less prevalent – sitting at 18% of calculations. This demonstrates that institutions place greater emphasis on present-year outcomes and forward-thinking metrics. This approach denotes a system that values immediate contributions more than sustained performance over time.
Similarly, in terms of tenure-based incentives, our research indicates that 18% of firms appear to adjust bonuses based on how long an employee has worked at the company. Even though a minority of firms adopt this approach, it mirrors a strategy intended to reward employee retention. This approach can help reduce turnover and promote long-term engagement – especially among high-performing employees who have demonstrated commitment to the firm.
Banks are more effective than ever before at ringfencing and retaining clients when senior relationship managers resign, diminishing individual leverage. Conversely, independent investment managers who maintain closer, and more active relationships with clients, experience greater pressure to retain talent through performance-linked variable compensation. This highlights the varying retention strategies between small and larger firms.
Generational hiring may also explain and influence data trends – for example, some firms have intentionally hired top junior talent to minimise dependence on senior hires with perceived portable books. This may lessen the pressure to pay large bonus packages – especially when they have confidence in retaining clients, should bankers leave.
Deflated margins and escalating operational costs also obstruct bonus growth. Universal banks are particularly affected by these factors with their extensive infrastructure and broad product offerings confining their flexibility to offer competitive bonuses.
The current wealth management market in London displays a clear split in compensation strategies. Independents tend to lean towards performance-related bonuses compared with the large banks, which tend to adhere to discretionary models.
Larger banks are reclaiming leverage over senior bankers as client portability weakens. More established or bulge bracket institutions focus on higher base salaries alongside the use of discretionary bonuses with a growing emphasis on luring junior talent. This talent may transform mid to senior-level bonuses in the coming years.
Our question to the market then would be: can discretionary bonuses endure into the future as a fruitful retention tool in an ever-changing environment?
Alex Diffey is a partner and Anastacia Bende is an executive search analyst at Valentine Thomas & Partners, a leading investment and wealth management executive search firm covering the EMEA markets. You can read more wealth management sector insights from the company here
