Retaining Top Investment Talent: Lessons Learned by Large Canadian Pension Plans

The Canadian pension plan system has long been lauded for its robust returns and resilience, especially in the face of volatile markets. One key aspect contributing to this success is the incentive frameworks that Canadian pension funds use to attract and retain top investment talent. In this post, we explore how the largest Canadian pension funds have structured their compensation plans to drive exceptional outcomes while managing market fluctuations and ensuring long-term sustainability. The insights here are derived from Southlea’s 2024 Asset Management Survey.

The Canadian model provides a framework for asset managers globally. Large Canadian pension funds manage most of their assets in-house, with the eight largest (the Maple 8) managing 80% of their investments internally.

Key Components of Canadian Pension Plan Incentive Structures

Incentive designs are the “secret sauce” in Canada’s pension plan system’s success. The incentive designs used by these organizations follow a multi-layered approach to ensure that individual, divisional, and overall corporate objectives are aligned. Some common components of these incentive frameworks include:

Corporate Metrics: These typically include performance measures tied to overall investment returns but also consider broader organizational objectives like talent development and client satisfaction.

Division/Asset Class Metrics: By aligning the incentive structures with specific asset class outcomes, pension plans can ensure that teams are focused on achieving their unique objectives while contributing to the broader goals of the organization.

Individual Performance: Pension plans also evaluate individual performance based on both the “what” (e.g., results) and the “how” (e.g., leadership and values). This holistic approach ensures that the right behaviors are incentivized across all levels of the organization.

In addition, both absolute and relative performance metrics are used to ensure that compensation aligns with market expectations and benchmarks. This balanced approach encourages investment teams to deliver not just in terms of returns but also in relation to the broader market conditions.

Adapting to Market Volatility

The past few years have underscored the need for flexibility in incentive design. With market volatility becoming the new normal, Canadian pension plans have been adjusting their frameworks to remain competitive while ensuring they retain their top talent.

For example, relative total fund returns are commonly used to measure performance. This benchmark helps to ensure that pension plans are not only generating returns but outperforming the market. However, given the variability of market performance, more sophisticated models are being used to assess relative returns, ensuring that the chosen benchmarks are appropriate and reflective of the organization’s specific investment strategy.

Another major adaptation has been the increasing focus on risk metrics. Pension funds are now incorporating additional risk measures into their incentive plans, moving beyond simple return measures. These risk-adjusted metrics, often assessed in consultation with the Chief Risk Officer, ensure that undue risk-taking is penalized and stable, long-term performance is rewarded.

Elongating Performance Horizons

Canadian pension funds have also adapted their incentive structures by extending performance periods. Historically, many plans have operated with three- to four-year performance windows, but more recently, these horizons have been elongated to five or even seven years. This longer-term approach aligns more closely with the long-term objectives of pension funds, smoothing out the impact of short-term market downturns and ensuring that compensation outcomes reflect sustained performance.

Judgment-Based Incentives vs. Quantitative Metrics

In a move away from rigid, formulaic compensation structures, many pension funds are now introducing an element of judgment into their incentive decisions. This shift allows for greater flexibility in compensation outcomes, particularly in volatile market conditions where strictly quantitative approaches may lead to skewed results. By allowing for informed judgment, pension plans can ensure that compensation decisions better reflect both the financial and operational realities of the organization.

Compensation Trending Down

Southlea’s 2024 Asset Management Compensation Survey highlights a notable trend: actual compensation levels for Canadian pension plan employees decreased by about 6% year-over-year, with senior employees seeing even larger declines. This is largely attributable to challenging market conditions, with senior employees — whose compensation is more heavily weighted toward long-term incentives — being the most affected.

Private asset classes, such as private equity and real estate, saw some of the largest year-over-year declines in compensation, reflecting the challenging conditions in 2023. However, it’s important to note that these trends are not isolated to one pension fund but are consistent across the asset management industry. When looking at specific private asset classes, amongst these senior employees, private equity and real estate pay dropped more significantly compared to natural resources/infrastructure which is reflective of the challenging market conditions of 2023. Below are the year-over-year decreases in actual pay for the senior employees of the following private asset classes:

Private Equity: -28%

Real Estate: -14%

Natural Resources / Infrastructure: -3%

A More Balanced Labor Market

The Canadian pension sector is also seeing changes in labor market dynamics. The labor market is more balanced between employers and employees than it has been in the recent past, with turnover significantly down and offer acceptance rates significantly up.

At median, total turnover decreased by roughly 25% to 8.9% and voluntary turnover rates decreased by approximately 45% to 5.4%. This significant decrease is reflective of the wider market conditions. Many firms across the market have slowed their hiring compared to previous years when they hired large numbers of employees, especially in the aftermath of COVID hiring freezes.

When looking at investment jobs, it was interesting to note that the time to offer acceptance and time to start increased year over year, but acceptance rates increased from 95% to 100% at median. This indicates that while it is taking longer to fill these investment roles, the search for these roles is resulting in more success hiring a candidate. It is also worth noting that the number of jobs being filled by internal candidates increased by 5% year-over-year (21% to 26%) and external hiring rates and the use of external recruiters are down.

Key Takeaway

The secret sauce of Canadian pension plan returns lies in their ability to attract top talent, carefully design compensation frameworks, and adapt to market conditions. By balancing risk and reward, extending performance horizons, and allowing for judgment-based incentive outcomes, these pension funds have created a resilient and competitive compensation system that continues to deliver outstanding results. As global markets evolve, other asset managers may look to Canadian pension plans for inspiration in crafting their own compensation strategies.