Mfs Case Analysis
Massachusetts Financial Services (MFS) may characterize their labor market for portfolio managers as a “star system”, their labor market certainly does not have a star mentality. Rather than recruit stars, they mentor portfolio mangers into becoming stars. MFS promotes a culture of teamwork and collaboration in which talent grows from within. MFS often recruits employees right out of business school as analysts. Analysts are then brought up through the MFS system and trained to become great portfolio managers; no employee comes in at a great or “star” portfolio manager.
Therefore, this ant-star mentality begins first and foremost at recruiting. From the very beginning management is open and clear with candidates about the compensation structure and culture at MFS. It is not the place to go if the candidate is only about money, prestige, and not willing to work with and train others. Their goal is to attract candidates looking to learn and grow with the company, not individuals who are stars or will become stars and leave for more pay. In addition to this, MFS never tried to lure star portfolio managers from other companies with large compensation.
Their mentality was that if they did that, that same portfolio manager would eventually leave them for an even larger paycheck. After the analyst is recruited, they are brought up through the “star system”. One of the main reasons for this system is to develop firm loyalty and a deep bench of talented people brought up through the system to replace a manager should someone leave. This system proved to be fruitful in terms of retention as most portfolio managers had been with them since the beginning and MFS was ranked as one of the top 100 places to work by Forbes Magazine.
MFS is successful at building loyalty amongst its employees because it not only is many employees’ first job out of school, but MFS also provided the training and knowledge to make employees successful at what they do. Portfolio Directors serve as player-coaches and are in the trenches with the analysts and portfolio managers.
Employees who have been in the business for a long time are therefore accessible to new employees to gain knowledge and learn from.
These employees gain a sense of loyalty to the firm since it was with MFS that they received their training, and then when they become senior they feel an obligation to pass on that knowledge to the new recruits. The whole anti-star and teamwork mentality is reinforced and really relies upon MFS’ compensation system. It is this compensation system that requires teamwork and mentoring by senior level employees, without teamwork and teaching employees can’t expect to receive as large a bonus.
Executives believe that their compensation system not only determines how they drive performance, but more importantly the type of employees the company attracts and who will stay with them long term.
At the foundation of this system is the idea that no portfolio manager is simply born with the ability to outperform a benchmark. Rather, the portfolio manager will outperform a benchmark through mentoring, teamwork, and experience on the job. The system also ensures that there is talent brought up through the pipeline to replace those that retire, or the few that leave MFS.
Therefore, the system not only rewards for portfolio performance, but also rewards for collaborative efforts such as mentoring and teamwork. In comparison to portfolio managers at other firms, the compensation at MFS was on the lower end.
Portfolio managers to do not receive the standard 20% of the upside, but employees know this going in. So in comparison, MFS has weak pay-for-performance linkages if you are simply looking at the numbers. However, if you are looking at qualitative measures, MFS has very strong pay-for-performance linkages.
Another implementation at MFS that insured longevity at the company was equity compensation that could only be redeemed at current value if an employee retired or changed careers. Anyone leaving for another firm or who was fired only received the values of the shares at grant date.
Another important compensation point worth mentioning is that employees did not take a hit on their compensation due to the market. During the financial crisis for example, compensation for portfolio managers did not change much.
One employee even noted that while a lot of portfolio managers were cleaning out their desk, he still had a job and was compensated fairly. This sort of compensation and backing through tough times also helps to breed firm loyalty. Since the firm stuck with the employee through tough times, the employee will remember this when they receive offers from other firms. Subjective evaluations make up two of the three parts of everyone’s determination of year-end bonuses.
The three objectives are fund performance, contribution to the investment process, and contribution to MFS overall.
The last two were subjective and based on written evaluations from peers and senior management. It is because employees know their co-workers and managers will review them, that teamwork is an essential part of the atmosphere. Employees know that if they don’t share their knowledge with other departments and new employees coming up in the pipeline, that they can’t expect to receive the highest bonus possible. Therefore, employees make more of an efforts to collaborate, mentor, and contribute to the investment process and MFS overall. However, because this appraisal processes is subjective, it is not without its flaws.
Some appraisals obviously can be more biased than others simply because someone works a long side someone more or their may be a personal outside of work conflict. In order for the appraisal system to work, there needs to be trust in the senior management to weed out these outliers and look at the overall evaluation. A potential problem could arise if there are biases in the senior management. Executives and other senior managers can prevent this through cross checks. Basically the more cooks in the kitchen the better to determine that the subjective evaluations are fair and unbiased.
I think one thing MFS has done well with the subjective evolutions is that is a full 360 degrees. It relies on feedback from employees that are both underneath and above the individual in the chain of command. This helps to ensure that there is a good cross section of evolutions. In addition, because senior managers are in the trenches with the teams, they know employees very well and know whose evaluations to give more weight to then others. They factor in everything from personality when determining the credibility of an evaluator. It is a great system of checks and balances that helps to ensure that evaluations are fair.
I believe using this compensation system that MFS can be successful in attracting and retaining hedge fund managers. While the hedge fund managers will not be making as much as they could be elsewhere, MFS has already shown that this is not a factor for their employees. Their portfolio managers are already making less than they could elsewhere. It is because of the culture, sense of loyalty, mentoring, and collaboration that employees remain at MFS. MFS can provide the same culture with their hedge fund, I think the only issue is putting in place the right leaders that will subscribe to and believe in the culture.
It is these senior leaders that will need to instill loyalty and mentor incoming analysts so that the hedge fund can survive long term.
I think once MFS gets over the initial hump of getting this process going, things will be running smoothly 5 years from now. MFS will have to build the staff of the hedge fund within, right out of school as they do now. If they simply try to recruit senior level people from the outside I believe they will be unsuccessful. These outsides will require compensation comparable to other hedge funds, which MFS will not be able to prove without undermining their current culture and compensation system.