GPIF Research Project

S U R V E Y O N C O M P E N S AT I O N
STRUCTURE (INCENTIVE SCHEME) OF
GPIF ASSET MANAGERS< R E P O RT F O R P U B L I C AT I O N >March 2019
MercerBACKGROUND, PURPOSE
AND APPROACH

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BACKGROUND AND PURPOSE• GPIF has steadily realized the mission of long-term investment return expansion contributing to thebenefit of the pension recipients, through publication of Investment Principles/ Stewardship Principles/
Proxy Voting Principles, joint research with The World Bank Group on ESG investment, enhancing
engagement with related organizations, and other various initiatives over the past several years, asmentioned in the 2017 and 2018 Stewardship Activities Report.
• Over the past few years, investment performance has been well above pension financial calculation
premise because of environmental factors such as positive stock markets in Japan and overseas, andefficient organizational management. On the other hand, in active investments, which approximates
20% of all assets, few funds have achieved their target excess return during the FY 2014 to 2016
period.
• From the view that some part of the low return rooted in non-proper operation in active funds(especially the tendency to focus on AUM growth rather than investment return under business
requirement), as well as selection approach of asset managers, GPIF fully introduced a new
performance - based fee structure in 2018, and have shown emphasis of alignment of interest.
• In these contexts, it is important to clarify if compensation structures for GPIF asset managers have
incentive scheme avoiding short- termism, or promoting long-term return expected by asset
owners.

• Thus, we examined the current compensation structure (especially incentive scheme) throughquestionnaire/ follow-up interviews, reviewed and analyzed if the compensation structure is contributing
to long-term return expected by long-term asset owners, and tried to reflect the result into selection andassessment of GPIF asset managers.
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APPROACH
Reporting

Follow -up
Interview

Questionnaire• Questionnaire survey oncompensation structure for
GPIF asset managers• Face-to-face or telephoneinterviews with all survey
participants• Summary of survey andinterview• Suggestion to assess
compensation structure

Revisit background and purpose of
the survey.

Conduct face to face or phoneinterviews with all GPIF asset
managers.

Summarize current status ofcompensation structures andoperations of asset managers as
individual reports.



Based on the questionnaire, follow
up focusing on whether they havecompensation structure effectively
avoiding short-termism or promoting
long-term return.

Overview the current status ofindividual asset managers, anddevelop assessment perspectives ofcompensation structure contributing
to long-term return.

Offer assessment perspectives ofcompensation structure (incentive
scheme) as part of the selection/
evaluation process by GPIF.

Investigation of compensation
structure for CEOs, CIOs andfund/portfolio managers of all GPIF
asset manages.
Questionnaires are common to all
asset managers, centering oncompensation and including wide HR
related theme that may affect asset
manager’s behavior.



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SUMMARY OF SURVEY
AND INTERVIEW

44C O M P E N S AT I O N S T R U C T U R E S U M M A R Y
 We assessed the compensation structure (incentive scheme) of the asset managers from the perspectiveof avoiding short-termism, and increasing long-term return.

 Most companies had moved into a compensation structure, effectively avoiding short-termism, reflecting
the trends and discussions in setting guidelines especially in EU/UK from the prudential/solvency
standpoints.
 From the perspective of promoting long-term return, we observed the below in leading companies,
although they varied by organizational context, history, etc.
 Compensation philosophy aligned to increase long-term return stipulated/ communicated Proper percentage against base pay and volatility of variables
 Individual bonus KPI based primarily on Investment Performance and not on AUM
 Assessing mid-long term Investment Performance (including equal to or more than 5 years(some are including even ８/10 years）
 Evaluate teamwork and contribution to organizational and talent development
 Have compensation structure based primarily on investment performance, and have proper
discretion to reflect true contribution of the individual Have Deferred schemes in payment or decision of the payout amount (not only time-based,
but also performance-based vesting) Promoting or having structure to invest in own funds
 With regard to ESG Head, a limited number of companies offered information, and not many havecompensation structures in line with their roll and responsibility.
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ASSESSMENT PERSPECTIVES
Perspectives–

F O C U S I N G

O N

H E A D

F M

Description
Alignment• There is a Compensation Philosophy aligned with promoting long-term
investment performance and incentivizing high performance.

Flexibility• There is flexibility within the Company Bonus Pool in order to reward highperformers even if the overall company is not performing well.

3

Investment Performance
Reflection• Investment Performance is clearly included as a KPI in deciding the total
Bonus Pool.

4

Investment Performance
Weight• Investment Performance has a certain weight (≻70%) among the individual
KPIs determining individual Bonus amount.

Individual
5 Bonus Allocation(KPIs)

Investment Performance
including 5 years or more

• Investment Performance KPI includes more than 5 years performance which
would be effective to avoid short termism.

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not linked to AUM• Individual KPIs are not linked to AUM, which would make more focus on
investment performance of the existing funds.

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Pay-out Distribution over time

• Bonus percentage vs Base is significant and the pay-out distribution
reflecting individual performance is significant (e.g. 100%×0.5-1.5 or more).

8

Deferred• Bonus payout is partly deferred until after particular years or paid over
several years in the form of cash/stock/fund etc.

9 Long-term Incentive

Eligibility• Has long-term incentive, paid after vesting period in the form of
cash/stock/performance share etc.

1

Compensation
Philosophy

2
Total Fund

10

Investment in
Own FundPromoting• There is a requirement of a certain percentage of Bonus/LTI to be invested in
Own/Flagship fund or promoting investment from own money.

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Own Shares
including Phantom

excluding listed shares ofnon- AM Parent Company• There is a scheme of providing shares (including phantom, but excluding
shares of Parent Company, covering other business).
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C O M P E N S AT I O N S T R U C T U R E B Y C AT E G O R I E S
 We assessed the compensation structure (incentive scheme) of the asset managers, and classified theminto 3 categories. The rough features of each are as follows.

Lagging*Compensation structure is not fully
utilized strategically

Sales, AUM growth rate andcommission fees tend to beemphasized.









Bonus funds and individual bonus
are determined by the same
scheme with that of parent company(banks, securities and insurance).
Bonus ratio vs base salary (in somecases reflect seniority rather thanexpertise), is very low and bonus
volatility reflecting performance isalso very small.
There is limited ability to view midlong term (several years) bonus
fund decisions and individual
investment performance.
No mid-to long term (several years)
structure regarding payment andvesting.

Average

LeadingCompensation structure is utilized
strategically.

Similar to Leading ：Compensation structure is utilized
strategically.

Proper percentage against base pay
and volatility of variables

Proper percentage against base pay
and volatility of variables.

Have Deferred schemes in payment
or decision of the payout amount.

Individual bonus KPI based
primarily on Investment
Performance and not on AUM.

Calculating Investment Performancesystematically, and evaluating
discretionary appropriately
excluding environmental factors.

Slightly different from Leading ：Investment performance is notproperly emphasized.

Period of investment performanceassessment is slightly short (3 years
or less)

Assessing mid-long term
Investment Performance (including
equal to or more than 5 years).



Have Deferred schemes in payment
or decision of the payout amount.

No schemes to invest in own funds

Promoting or having structure toinvest in own funds

*Almost no compensation structure was found to promote short-termism due to guidelines and initiatives from solvency
perspective in EU / UK, etc.. Many are classified as Lagging, as they do not use compensation structure strategically. 7

C O M P E N S AT I O N S T R U C T U R E O V E R V I E W 1 / 2
C AT E G O R Y
Lagging

UniqueCompensation Philosophy(N=1)

 Started to introduce structuresthat fit asset management, but
not yet in a phase to utilize
compensation strategically.

In between (N=10)
Similar with Leading; Strategic use of compensation,and have deferred structures.
On the other hand; Lesser weight in reflecting
investment performance.

Strategic use ofCompensation structure(N=20)
 Have compensation structure
based primarily on investment
performance, and have proper
discretion to reflect true
contribution of the individual.

In between (N=2)
 Reflecting equal to or morethan 5 years investment
performance, andvariable/volatility percentage
higher.
 Have deferred portion/
investment in own fund.

Domestic

Non-strategic use ofcompensation structure(N=7)

Leading

International

Low Disclosure(N=5)

Average8

C O M P E N S AT I O N S T R U C T U R E O V E R V I E W 2 / 2
COMPANY TYPE

Listed(N=5)
With Mutual
Fund Unit.
Stock grant/
stock ownershipplan linked tocompany
performance.

While CEO/CIO have the same
compensation structure of parent
company, have certain uniqueness asasset managers (such as emphasis on
mid- long term investment performance,etc.).



Mostly within compensation structure/level of parent/group company.

Emphasize long-term talentdevelopment and team investment.

Private – Others (N=5)
Have Phantom Stock scheme.
Bonus ratio is properly high andinvestment performance weight in KPI
is also high.

Domestic

Parent Listed(N=9)
Subsidiaries of banks, securities/
insurance companies, etc.

Have Profit-Share Bonus/ Stock
Ownership/ Investment in own fund plan.
Develop individual investment
professionals from a long-term
perspective.

International

Parent Listed(N=21)
Subsidiaries of banks, securities/
insurance companies, etc.

Private – Partnership (N=5)


9INCENTIVE SCHEME：OVERVIEW

Base

Bonus

Deferred

LTI (Long-term Incentives)

Base：

Bonus Fund:

Deferred Bonus：

Long-term Incentives：• Fixed cash payments,
annually reviewed
reflecting such as
market increase rate,inflation rate,evaluation, andresponsibility.

• Increase/decrease within acertain range, taking into bothcompany performance andindividual performance.

• Part of bonus deferred and paidout cliff or distributed over
several years.

• Grant certain amount of shares,
stock options or phantom stock,and vest according to stock
price/ company performanceseveral years later.

• Base and totalcompensation
determined to becompetitive taking into
account market levels
by country.

Allocation to individuals:• KPI consisted of mainly numeric(investment performance for past
1 and multiple years,
company/division performance)and some qualitative.
• With proper volatility reflecting
performance.

• KPI and volatility range aredetermined as scheme or withdiscretion.

Deferred bonus with performance conditions has similareffect with LTI (not only retention but also motivation for
long-term performance improvement)

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INCENTIVE SCHEME：BONUS
Bonus fund

Allocation to individual

Bonus payout
Bonus

Bonus fund amount$$Individual bonus payout
onetime payout(cash)

High
performance
TargetpayoutCompany/Divisionperformance• Increase/decrease within acertain range, taking into
both company/divisionperformance and individual
performance.
- Some companies havelarger fluctuationreflecting
company/divisionperformance.

Deferred

generally
3-5years
Individual
performance• KPI consisted of mainly
numeric (investment
performance for past 1 andmultiple years,
company/divisionperformance) and somequalitative.
• With proper volatility.
- Often with threshold asshown above

Payoutincrease/decrease[no conditions]Fixed amount will be (No change)
paid a few years later[with performance
conditions]
Amount of paymentchanges according to
the performance over
several years until the
payment

Granted as stock
Linked to company
performance
Investment in own
fund

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I N C E N T I V E S C H E M E ： LT I
Generally 3-5 years
Current year

Few years later

Determine grant Increase/decrease amount or numberof shares to reflect performance orstock price

Payout amount or number of shares decided (cliff
or distributed payout)※ Generally time-based

LTI vehicle

Stock/cash

Increase/decrease

Restricted share

Stock

Stock price

Performance share

Stock

Stock price/company performance

Stock option

Stock acquisition right

Stock pricePhantom stock

Cash

Stock priceInvestment in own fund

Cash

Investment performance(Stock reflecting company performance)

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INCENTIVE SCHEME：INVESTMENT IN OWN FUND
Capitalincrease/decrease
scheme or fund

Vesting conditions/payoutLinked to own fundperformance
After several years
cliff or multi-year
payoutPart ofbonus/LTI
Own fundAfter several years
cliff withperformancethresholdIndividual capital

Own fundNo condition forpayout13

QUESTIONNAIRE SUMMARY1414

QUESTIONNAIRE SUMMARY 1/4
Performance and Review Cycle

Pay Mix

How often is fixed pay reviewed for covered roles?

Compensation Mix (Average)
Fixed Pay

Annually
No set frequency for review

STI

LTI

87%
1) CEO

26%

34%

39%

2) CIO

27%

34%

39%

2%

Others11%3) PM/FM

4) Stewardship/
4)
ESG/Sustainability
Stewardshi…
Head

Do employees receive an annual performance rating?
Y

N

93%

7%

Do employees have a separate rating for behavior?
Y

44%

47%

31%

59%

23%
31%

10%

Percentage of Variable Pay vs Annual Base Salary
STI1) CEO
TargetActual2) CIO
TargetActualMedian

45%

75%

LTI

1) CEO
TargetActual2) CIO
TargetActualMedian

190%

114%

126%

3) PM/FM
Target

53%

58%

N

56%

273%

3) PM/FM
Target177%

268%

Is there a minimum performance rating threshold for any of the following?
STI Payment/Delivery
Y

42%

LTI Payment/Delivery
Y

N

56%

41%

STI Volatility (STI Target = 1)
1)CEO2) CIO

3) PM/FMMin Target Max

Min Target Max

Min Target Max

0.0

0.5

0.5

N

59%

Median

1.0

1.5

1.0

1.5

1.0

1.3

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QUESTIONNAIRE SUMMARY 2 /4
Annual Base Salary/ Fringe Benefits
Fixed Pay: percentage (Average)

Cash

Share

Short term incentives 1/3
Fund KPI (KPI for the bonus pool funding)(multiple answers)
0%

Other

20%

40%

60%

80%

100%

30%

40%

50%

Revenue

1) CEO100%2) CIO

100%3) PM/FM100%

ProfitInvestment Performance
AUM

Other Numeric
Qualitative

Individual KPI(multiple answers)
PM/FM
0%

10%

20%

Revenue
ProfitInvestment Performance
AUM

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QUESTIONNAIRE SUMMARY 3/4
Short term incentives 2/3

Short term incentives 3/3

Short Term Incentive KPIs / metrics

STI cash/share /other percentage
Cash

Numerical vs Qualitative

Deferredcash1) CEO

1) CEO72%

28%2) CIO64%

36%3) PM/FM

66%

34%

Share

Performance share

56%

18%

2) CIO63%3) PM/FM

68%

Other

14% 8%4%

17%

13%3%
4%

19%

10%
0%
3%

Vesting provisions / time frame
Numerical

CEO

CIO

PM/FM

No deferral

30%

42%

35%

Less than 3 years

7%

0%

4%

3 years

48%

54%

38%

4 years a more

11%

4%

19%

Others

4%

0%

4%

100%

100%

100%

Qualitative

Discretionary vs Formulaic (Numerical)
1) CEO

43%

43%

14%

2) CIO

45%

45%

9%

3) PM/FM

47%

40% 13%Total

Discretionary

Formulaic

Both

What % of STI is mandatorily deferred?
1) CEO60%2) CIO

3) PM/FM

50%
40%
30%
20%
10%
0%

＜20%

≧20% to ＜40%≧40% to ＜60%

≧60%

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QUESTIONNAIRE SUMMARY 4/4
Long term incentives
LTI eligibility

1) CEO2) CIO
3) PM/FMLTI vehicles

Yes
65%
56%
36%

Stock/Stock options
Phantom plans
OthersPerformance shares
Cash LTI

1) CEO27%

25%2) CIO

25%

31%

3)
PM/FM

18%

26%

5% 15%
6% 15%
13% 13%

28%
23%
30%

Own investment in the fund
Yes
52%

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APPENDIX 1
GENERAL TRENDS ON
G LO B A L
C O M P E N S AT I O N S T R U C T U R E

1919

WHI L E EXECU TI VE R EMU N ERATION STR U CTUR ES B ETWEENKEY GEOGRAPHIES HAVE SOME UNIQUE CHARACTERISTICS,
WE ARE BEGINNING TO SEE CONVERGENCE

Europe● Salary increases generally in line with Retail
Price Inflation● Convergence on a “market norm”● LTI typically a performance share plan
vesting subject to EPS growth and total
shareholder return● Time horizons are increasing to 5 years● Increasing use of bonus deferral and LTI
holding periods becoming more common

USA

APAC

● Moderate salary increases – broadly aligned ● Approach differs depending on country
with Europe – albeit salaries remain muchmaturity
higher than in Europe● Salary increases also vary materially● More leveraged pay mix than in Europe● Pay mix typically weighted more towards● Extensive use of annual variable pay plans,
both in terms of eligibility and meaningful
size of award opportunities● Broader eligibility for LTI participation● A “portfolio” approach to LTIs is common,with c.2-3 plans – typically a performance● Number of measures increasing, withshare plan, share options, and time-vesting
traditional measures (e.g. EPS) being
sharescomplemented with other financial / strategic
measures (e.g. returns)● Performance shares have increased in bothprevalence and weight in overall LTI mix

fixed pay than USA and Europe● As the global market place for executive
talent increases, there is a general trend tomove towards European and USA practice,i.e. more variable pay, higher quantum● Cash bonuses common; beginning to see an
emergence of LTIs

● For performance shares, use of total
shareholder return is prevalent though isincreasingly being complemented with otherperformance metrics

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Overview of global remuneration structures & emerging trends

 On a regional level, the typical structure of remuneration packages varies, with APAC/Japangenerally being more conservative and the US the most aggressive

Conservative

Aggressive

Quantum of pay
Low

Balance of fixed andvariable pay

Short vs long term
incentive mix

Mostly fixed

Weighted towards
short termHigh

Mostly variable

Weighted towards long term

CEO pay ratio
Low

High

Link to performance
Based mainly
on seniority

Strong link to performance21

Overview of global remuneration structures & emerging trends

LONG-TERM INCENTIVES
Prevalence of
LTI plansConservative

Aggressive

Low

High

Depth of participation
Limited to senior
management
Use of performance
conditions

Extended deep into
the organisation

Awards usually vest on
continued employment

All awards vest on
company/individual performance

LTI % vs Base

0%

50%

100%

SHORT-TERM INCENTIVES
Performance linkage
Group / businessperformance

Individual performance

STI % vs Base

Probability of vesting attarget/budget

0%

50%

100%

100%

50%

0%

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APPENDIX 2

REGULATORYENVIRONMENTSURROUNDINGASSET MANAGEMENT

23

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R E G U L ATO R Y C H A L L E N G E S FA C I N G A S S E TMANAGEMENT

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U K R E G U L AT I O N O F R E WA R D

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T H E R E M U N E R AT I O N C O D E P R I N C I P L E S –GENERAL AND STRUCTURE

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E U R O P E A N - L E D R E M U N E R AT I O N R E G U L AT I O N
FOR CREDIT INSTITUTIONS AND INVESTMENTFIRMS, AND ASSET AND FUND MANAGERS
Summary of European-led financial services regulations as they pertain to remuneration for Material Risk Takers
CRD IV

AIFMDUCITS V

Types of firms affected

Credit institutions and certain
investment firms

Asset / fund (excluding UCITS)
management firms

UCITS find management firms

Applicable from

1 January 201422 July 20131

18 March 20161

n/a

n/a

Remuneration requirements for Material Risk Takers
Variable pay cap

Must not exceed 1x fixed pay (or 2x
subject to shareholder approval)

VehicleMinimum of 50% of Variable remuneration to be delivered in appropriate instrument(s). E.g. shares, non-cash instruments
and/or bail-in/convertible instruments2

DeferralMinimum 40% of Variable remuneration to be deferred over minimum of 3 to 5 years, rising to 60% where Variable
remuneration is “particularly high”, vest no faster than on a pro-rata basis

PensionDiscretionary pension benefits must be held by the firm in the form of instruments for a period of 5 years after leaving thefirm, or retirement

Malus / Clawback

Required…
… for misconduct which resulted insignificant losses to the institution, or
failure to meet appropriate standardsof fitness and propriety

Disclosure

1.
2.

… for malfeasance or a material failure
to manage risk by senior staff who
could be reasonably expected to beaware of misconduct, or misconduct… to considerably contract total
variable remuneration where subdued
or negative financial performance ofthe management company or of the
UCITS concerned occurs

Details of their firm’s remuneration policies at least annually

Member state deadline for transposing EU legislation into national law
For UCITS, does not apply if UCITS management is < 50% of the total portfolio managed by the management company

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Mercer consultants compiled the report entrusted by GPIF as a research project.
Mercer’s more than 23,000 employees are based in 44 countries, and the firm operates in over 130 countries.
Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), the leading global
professional services firm in the areas of risk, strategy, and people.
GPIF as well as Mercer do not guarantee accuracy and completeness of information and data included in thereport.
Copyright © 2019 Government Pension Investment Fund All rights reserved.
Title: “Survey on compensation structure (incentive scheme) of GPIF asset managers”（March 2019）
Published by: Mercer (Midtown Tower, 9-7-1, Akasaka, Minato-ku, Tokyo 107-6216, Japan)

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