Family Offices Could Teach UK Banks A Thing Or Two About Uncapped Bonuses
As the UK’s mini budget, second mini budget and upcoming full budget come under fire from all directions, there is one thing that everyone is talking about and that is bankers bonuses.
Despite tax reductions being reversed, another chancellor being removed from Cabinet and a two-year energy cap, being uncapped, one thing staying firmly on the agenda is the decision to reverse a regulatory cap on bonuses in the UK banking sector and the rest of the Kingdom is questioning why.
While the UK tries to answer that question, we explore how uncapped bonuses already work in Family Offices and the lessons that could be learned for banks once passed.
The move was proposed by former chancellor Kwasi Kwarteng in a bid to make London more attractive for global banks and for workers amid what is being widely described as a talent shortage. It is also thought to offer more long-term incentives to critical banking professionals, something Family Offices know a thing or two about.
Family Offices are not regulated, therefore, nor is their compensation. This allows some Family Office professionals to walk away with extraordinary amounts of wealth every year and in return, it keeps Family Offices alive.
82% of Family Office Executives receive a performance bonus. While this will differ from Family Office to Family Office, there is no regulatory cap in place and based on our annual research, we have found the average Chief Investment Officer receives 31% – 50% of their salary as a bonus in the UK while in the US, this often sits at the 100% mark. For Chief Executive Officers and Managing Directors, this figure sits between 51% and 75% of annual salary. This means CIOs often walk away with more than $792,000 in the US while CEOs in the UK earn around $612,500 a year.
These figures might not appear to be as high as those you see in Investment Banks today but in Family Offices, money isn’t everything. Despite boasting some of the world’s greatest wealth, working for a Family Office is very rarely about the compensation you receive. While compensation must be benchmarked and standardised and is very rarely low, it is often more about being able to make a greater impact – working in an intimate team with unlimited liquidity to achieve a shared long-term objective.
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Working in a Family Office also offers unrivalled security which we saw following the pandemic when Investment Bankers pulled 100-hour weeks in an attempt to claw back any hope of a bonus in a time broadly referred to as ‘bonus backlash’ while Family Office Professionals walked away with 100% if not 200% of their annual salary as bonus season closed a successful year for Family Offices.
This is also not to say the average figures given above are representative of every Family Office. We work with a Family Office where the Chief Investment Officer receives a basic salary of over £2M a year without any additional bonus or incentive. He has a very meritocratic bonus structure in place to reward his entire team.
He said: “Our bonus structure is simple. It is not dependent on the success of an individual asset class nor does it differ based on the liquid/ illiquid nature of the asset. Each employee is able to take home 100-200% of their salary as a bonus each year, dependent on the upside return and their own personal performance. We say it is discretionary as we frequently boost the figures to ensure they walk away with more than the matrix suggests. This year every single employee has walked away with 150-200% of their annual salary and we believe it is this ‘share the pot’ mentality which has awarded us a loyal and motivated team.”
Ultimately, uncapped bonuses are used to motivate, engage and embed critical professionals into the Family Office but they are not used in isolation. The most important instrument, and one that banks can learn from, is a Long-Term Incentive Plan (LTIP TIP ) and how above any type of traditional bonus, when implemented effectively can engage staff, align interests and incentivise them to stay within your organisation for as long as they can – something Family Offices require to survive and something that would banks could benefit from. One of the reasons in fact cited by Kwarteng to push ahead with this move as high-base salaries and low-bonuses are creating a churn of workers and driving up costs for British banks.
LTIPs were traditionally delivered in the form of a performance share but have evolved in the world of Family Offices to incorporate a whole host of rewards including Carried Interest, Stock Options, Co-Investing Opportunities, Forgivable Loans and Matched Investment. Professionals with longer term reward structures are most content and driven to succeed within their Family Office and according to a recent Agreus survey, believe that LTIPs are far more important than any monetary annual compensation as it helps them to feel valued.
LTIPs also proved to be particularly useful during the pandemic when a variety of factors made rewarding bonuses alone extremely difficult.
COVID-19 alongside the push to IPOs in some of the emerging markets, a new generation of wealth, a focus on ESG and a heightened awareness of digital assets such as cryptocurrency have all forced Family Offices to further diversify. While making the Investment Space a whole lot more interesting, it further complicated how Family Offices reward Investment Professionals, especially when it comes to bonuses.
Family Office Investment Professionals broadly led by Chief Investment Officers are responsible for a broad range of assets under management. Each of these assets necessitate a unique set of requirements from the length of time, commitment and contribution involved, the skill set and specialism required and the level of risk it calls for. They also carry unique factors impacting level of return and ability to measure that return from holding period yields, inflation and interest to demand and economic growth. Each asset class also requires a different benchmark, which as we now know is more than half of the time based on different indexes, industries, regions and countries.
All of these idiosyncrasies make valuing assets an individual and laborious task but awarding a bonus based on those valuations is near impossible and has only been exacerbated by the move to further diversify as well as recent Investment hiring trends.
All of the above have further complicated the conversation around bonuses and as a result, Family Offices adopted three new rules during the pandemic. These include:
1) The move to increase discretionary bonuses based on overall fund performance
2) An introduction of LTIPs for critical members of staff, not just on the investment side of the business
3) An emphasis placed on preserving as well as generating wealth
While banks cannot follow the exact guidelines set out by Family Offices, so long as they embed LTIPs and uncapped bonuses with clear and correlating key performance indicators, they can use this reward structure to engage and retain staff while creating a successful and meritocratic organisational culture which is inherently more competitive and guarantees every employee is striving to reach the same goal.
A Deeper Look At DeSantis’ Anti-ESG Legislation: What Is ESG?
Florida’s anti-ESG legislation, championed by Governor Ron DeSantis, is positioned to be the model for anti-ESG legislation in the United States. 20 Republican Governors have already signed on to adopt similar policies. The legislation itself is massive and sweeping, touching on multiple areas of law and policy. This is the first in a series of articles that will deep dive into Florida’s proposed legislation and look into its potential impacts in the larger ESG debate. However, before looking at the language of the legislation, we must start at the beginning. What is ESG?
ESG stands for environmental, social, and governance. It has gone by other names over the years including impact investing, social impact investing, and sustainable investing. At its core, it is an investment strategy. A way to use your money to impact change. We often see this in political movements. Conservatives boycotting Disney because of “woke” policies, or going to a business to support their Christian values. Liberals boycotting businesses over Black Lives Matter stances, or supporting environmentally friendly companies. Companies know that, and they include it in their marketing strategy.
In theory, ESG just took that to the next step and applied it to your retirement funds, giving you the option to choose how your money is invested. Fund managers already present their clients with multiple options, allowing the investor to choose their level of risk. ESG adds another option, where the investor can choose a lower return, but feel like their money is doing something good. Investing in a green company may not make you as much money, but you’ll feel like you’re doing your part to help the environment. If that is your choice, you should be allowed to make it. However, ESG took on a life of its own.
If I told you that the United Nations developed a plan to manipulate financial investments to force businesses to enact environmental and social policies that align with their goals, announced by Al Gore, you would probably start pushing me into the conspiracy theory category. Yet, it happened. It didn’t happen in secret. There are no leaked documents or conspirators. It happened in public, through public meetings, with clearly stated goals and outcomes, and they held a press conference to announce it. We just didn’t know what they were talking about.
That push drove ESG, primarily in the European Union. This rapid growth was problematic for those tasked with making financial decisions. The first real issue for ESG was the lack of clarity. Sure, “e” stands for environmental, “s” stands for social, and “g” stands for governance. “C” is for cookie, and while that is good enough for the Cookie Monster, that is not good enough in the world of financial investments. Terms need clear definitions, measurements, and projected outcomes.
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When most people discuss ESG, they gravitate towards the environmental piece. It appears to be fairly self-explanatory; a company that is environmentally friendly. However, environmentally friendly is a vague term. It could be a reduction in waste, adding solar panels, low emission vehicles, or any number of factors, all of which are self-reported by the company. As no reporting standards are currently in existence, companies can make their claims based on their own internal calculations, and fund managers can make their choice to invest based on what they choose to prioritize. This has led to what is known as greenwashing, or when a company exaggerates its environmental policies in order to appear more environmentally friendly than they really are.
Do not overlook the social and governance components, as that is where the real conflict arises. In the United Kingdom, social includes investment in affordable housing. In the European Union, it looks at factors like the use of slave labor in the supply chain. In the United States, it includes diversity and inclusion. Those factors, and how they are weighed, vary wildly from jurisdiction to jurisdiction and fund manager to fund manager. ESG is not just about the environment.
There are international efforts to create reporting standards, but they will not be released until later this year and no front-runner has been selected. That alone is problematic, to say the least.
To this point, I’ve presented ESG as if it is your choice, but ESG has taken a turn from elective to mandatory. A select group of fund managers followed the UN’s lead and started including ESG factors in all their funds, under the premise that ESG is good for the long-term growth of a company. This approach has wide ranging impacts. It effects long-term growth calculations for publicly held companies. It impacts credit ratings for government bonds. Banks are calculating the risk of business loans and accounts based on ESG. What was an abstract concept a few years ago, is now directly driving sectors of the business and financial markets.
In response, business leaders and Republican elected officials began pushing pack. The Trump administration introduced a Department of Labor rule limiting ESG that was eventually overturned under the Biden administration. States then started taking action. Texas struck first by adjusting how they invested state pensions. Florida followed soon thereafter by doing the same, then took it a step further introducing their anti-ESG legislation.
The legislation addresses five key areas: investment of state money, investment of pension funds, issuing bonds, banks, and government contracts. Those areas are about states controlling what they can control. Over the next few articles, each of those areas will be looked at in depth. What is happening in Florida could be the future of the anti-ESG movement in the United States.
Don’t Make A Mess Out Of The Texas Citizens Participation Act
The Texas legislature is considering a proposed amendment to the Texas Citizens Participation Act (TCPA), which is the Texas Anti-SLAPP law and roughly the equivalent to the Uniform Public Participation Act (UPEPA) which is in the process of being adopted nationwide. Because the proposed amendment has the potential to create more problems than it solves, and in fact may create a mess of things, some analysis is in order.
The TCPA is found at Texas Civil Practice and Remedies Code § 27.001, et seq. The TCPA basically provides that if one party files an action some sort of action which infringes upon certain constitutional rights of another party, that second party (movant) may file a motion to dismiss the action of the first party (respondent) in certain circumstances.
I will not go into the entire operation of the TCPA, but will instead here focus upon only the part that is relevant to the proposed amendment.
If the movant’s motion to dismiss is unsuccessful, then the movant may appeal under § 27.008 of the TCPA and the corresponding § 51.014(a)(12) that provides for an interlocutory appeal of a trial court’s denial of a motion to dismiss. Very importantly, § 51.014(b) provides that while this appeal is ongoing, all other proceedings at the trial court are stayed pending the appeal.
The stay pending the resolution of the appeal is necessary to avoid potential wasted effort by the trial court and the litigants. Otherwise, if the litigation were to proceed before the trial court while the appeal was ongoing, but the appeal later reversed the denial of the TCPA motion, everything that the trial court and the litigants would have done in the interim would be totally wasted activity.
Of course, the respondent who defeated the motion to dismiss wants to get on with their case, but the truth is that the stay pending appeal is probably not going to be very long anyhow, because § 27.008(b) provides that “[a]n appellate court shall expedite an appeal or other writ, whether interlocutory or not, from a trial court order on a motion to dismiss a legal action under Section 27.003 or from a trial court’s failure to rule on that motion in the time prescribed by Section 27.005.” So, if there is a delay in the litigation, it should be only a short one and thus there is no need for a relief from the stay.
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The bottom line is that there is nothing wrong with this stay during appeal as it currently exists in the statutes. It doesn’t need fixing. Nevertheless, in SB896/HB2781 the Texas legislature is considering tinkering with § 51.014 to limit the application of the stay pending appeal to three circumstances:
First, where the motion to dismiss failed because it was untimely under § 27.003(b);
Second, where the motion to dismiss not only failed, but was also deemed to be either frivolous or assert solely for the purposes of delay, per § 27.009(b); or
Third, where the motion to dismiss was denied because an exemption to the authorization of the motion existed (such as commercial speech, wrongful death claims, insurance disputes, evictions, etc. ― Texas has a bunch of such exemptions) under § 27.010(a).
The reason for this tinkering is implicit: If the TCPA motion to dismiss does not seem like a close call, there is no reason to delay the litigation while the movant (who lost the motion to dismiss) prosecutes what is likely a fruitless appeal.
Except that there is.
The hard truth is that trial courts frequently get things wrong. So frequently, in fact, that states such as Texas have full-time appellate courts with numerous districts to review purported errors by the trial courts. Particularly where the state courts are asked to consider matters with constitutional implications ― issues which, unlike the federal courts, they rarely deal with ― the state courts have a tendency to err. Plus, once a trial court has made one misjudgment, the effect is usually to snowball and result in other bad rulings that follow, such as sanctioning a party who was right in the first place.
Thus, long ago it was determined that it did not make any sense for litigation at the trial court level to go on at the same time that there was an appeal pending, for the reason that if the appeal ends in a reversal then whatever the courts and the parties were doing up to that point in the trial court becomes a giant pile of wasted judicial resources and efforts. This is the very reason why § 51.014(b) stays activity at the trial court level for interlocutory appeals. Such is even more important in the Anti-SLAPP context, such as with the TCPA, where one of the primary purposes of such statutes in the first place is to conserve the judicial resources of the courts and the parties — and particularly the party against whom abusive litigation has been brought.
However, the single counterargument against allowing the litigation to go forward during the appeal as in the proposed Texas amendment is this: The appeal is not going to last very long anyway, because of the mandate of § 27.008(b) that the appellate court must resolve a TCPA appeal expeditiously. Because the appeal period will be short, there is really no compelling reason to risk wasting judicial resources and the parties’ resources in the meantime. The proposed amendment to the TCPA is a solution in search of a problem.
It also must be considered that what the Texas amendment really attempts to do is to negate what amounts to a frivolous appeal by a party that has lost its TCPA motion. However, there is already a remedy for that, which is that the Texas Court of Appeals may itself award monetary sanctions for a frivolous appeal. Thus, if a party files a bogus appeal of the denial of their TCPA motion, the Court of Appeals may award appropriate monetary sanctions, not just against the party who brought the appeal but also against the counsel who filed that appeal. This is a significant deterrent to the bringing of such appeals.
But let us consider what might be done in these circumstances if somebody really just wanted to do something for the sake of doing something. It would not be the proposed Texas amendment. Instead, the appropriate solution would be to allow the Court of Appeals the discretion to lift the stay under § 51.014(b) upon the request of a party or upon its own initiative in the described circumstances.
What happens with all appellate courts, including the Texas Court of Appeals, is that the particular panel makes a decision on the outcome of the appeal pretty quickly. The delay in the Court of Appeals issuing its ruling is that it takes time to write the opinion to support the ruling. If the Court of Appeals knows that it is going to rule to deny the appeal, then the Court of Appeals at that time could lift the stay at the trial court level in anticipation of their future formal decision denying the appeal.
The problem of the stay pending appeal is not a trial court issue, and should not be resolved by changing what goes on with the trial court, but instead is an appellate issue that should properly be resolved (if at all) by allowing the Court of Appeals the option of terminating the stay. One thing is certain: The proposed amendment to the TCPA that automatically terminates the stay is not the way to deal with this issue ― if, indeed, an issue actually exists at all.
What Are The 2nd Quarter Teflon Sectors?
The FOMC decision last week fulfilled most expectations, but it was the details that hit stocks Wednesday afternoon. The conflicting comments between Fed Chair Powell and Fed Secretary Yellen on bank guarantees spooked the market as the futures dropped 70 points in the last hour.
It was not surprising that the concerns over the banking system continued last week after last weekend’s emergency buyout of Credit Suisse. The pressure on Deutsche Bank (DB) increased Friday as the US shares were down 5.5% in reaction to their credit default swaps (CDS) hitting a four-year high on Thursday.
For the month DB is down almost 25% as the German Chancellor Olaf Scholz came out with supportive comments on Friday. Most banking analysts do not appear to be worried as Stuart Graham and Leona Li, analysts at global financial research firm Autonomous, said that “Deutsche is in robust shape.” Also, DB has turned in 10 straight quarters of profits.
What was surprising for most was the stock market’s ability to rally on Friday as most of the major averages did close the week higher. Once again the Nasdaq 100 led the way up 2% to push its year-to-date gain to 16.7%. The S&P 500 ($SPX) and Dow Jones Industrial Average ($INDU) had smaller gains of 1.4% and 1.2% respectively. The disparity on a YTD basis has widened further as $INDU is down 2.7%.
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The iShares Russell 2000 had a volatile week but closed up 0.7% while the Dow Jones Utility Average was the weakest, down 1.4%. It is now down 5.9% YTD as it is the weakest performer. For the week the NYSE advance/decline ratio was positive as 1808 issues were advancing with 1385 declining.
As of Friday’s close, the Invesco QQQ Trust (QQQ) was up 1.97% in March as it closed just above the 20-month EMA at $305.24. The next monthly resistance is the August high at $334.42. The multiple-month highs from early in 2022, line a, are in the $370 area. The March low at $285.19 is now an important support level to watch.
The Nasdaq 100 Advance/Decline line is a bit higher this month but still below its WMA as it has been since August 2022. A move above the WMA does not look likely this month. The weekly A/D line (not shown) is fractionally above its WMA as is the daily A/D line.
The monthly relative performance (RS) has moved above its WMA for the first time since late 2022. This is a sign that the QQQ is leading the SPY higher as we move into April. In late January the weekly RS signaled that QQQ was leading the market higher.
The outperformance of growth stocks was not the consensus view at the start of the year or in February. Now the question is whether the growth stocks will continue to move higher despite the strong recessionary fears.
So far in March, the iShares 1000 Growth ETF (IWF) is up 3.5% while the iShares 1000 Value ETF (IWD) is ETF is down 4.3%. The ratio of IWF/IWD formed a V-shaped bottom at the start of the year and moved back above its 20-week EMA in late January.
The downtrend (line a) was broken two weeks and the resistance at line b has also now been overcome. The August peak at 1.631 is the next barrier for the ratio. The ratio is well above its 20-week EMA so it is a bit extended on the upside. The MACD-His did form a slightly positive divergence at the late 2022 lows, line c, and is still rising strongly with no divergences yet.
The monthly analysis of the iShares 1000 Growth ETF (IWF) shows that it closed on Friday just below the 20-month EMA at $237.87. The February high was $242.87 while the monthly starc+ band is at $290.06. The long-term support from 2020, line a, was tested in October.
The monthly RS has just moved above its WMA suggesting that IWF can continue to lead the SPY over the next quarter. The volume has declined over the past two months and the OBV is still slightly below its WMA. The weekly indicators (not shown) are positive.
Of the eleven sectors, there are just two where the monthly RS is rising and it is above its 20-month WMA. The Technology Sector Select (XLK) is up 7.1% so far in March and is currently trading above the February high. The high from August at $150.72, line a, is the next barrier.
The monthly RS has moved further above its WMA in March consistent with a market leader. The volume increased a bit in March and the OBV has moved above its WMA for the first time since April. The weekly indicators (not shown) are positive as the RS is well above its WMA.
The Communications Services Sector (XLC) is up 6.2% in March with the next resistance at $60.24. On a move above this level, the monthly starc+ band is at $67.60. The March low at $51.37 should be good support.
The monthly RS has just moved above its WMA indicating that XLC is leading the SPY. The RS dropped below its WMA in October 2022, one month after the high. The volume has been strong this week and the OBV has moved above its WMA and the resistance at line c, which is a good sign. The weekly studies (not shown) are positive with last week’s close.
Crude oil reversed on Friday to close back below $70. In last week’s review I shared my concerns over this sector as it could hold the major averages back. Sharply lower crude oil prices also could add pressure on some of the regional banks which is not what they need.
In conclusion, the analysis of the Growth/Value ratio and the monthly RS analysis suggests that growth stocks and EFFs should be favored on any pullback. The technical evidence indicates they should be Teflon-like in the next quarter and hold up better than the value stocks.
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