Why is this man smiling?In 2012, news reports suggested that the firm's top 30 partners “pulled down an average $33 million a year in compensation in recent years.” A subsequent column by Felix Salmon guessed that the average investment professional at Pimco was making “roughly $7 million each” annually.
A Pimco spokesman denied Salmon's claim, responding that “The numbers cited in your blog post today are wildly inaccurate.”
Salmon's speculation was, indeed, wildly inaccurate -- to the downside. Actual bonuses at Pimco are higher, much higher, than probably any outsiders previously believed. Based on news reports, public records and new data obtained by Bloomberg View, it appears that Pimco had a 2013 bonus pool for its 60 managing directors of almost $1.5 billion.
So how much have Pimco's top executives earned? According to documents provided to Bloomberg View by someone with knowledge of Pimco's bonus policies, the numbers break down like this: Gross earned $290 million as his year-end bonus for 2013. Mohamed El-Erian, Pimco's former chief executive officer and one-time heir apparent to Gross, received $230 million (El-Erian is a
fellow Bloomberg View contributor).
And the story doesn't end with Pimco's two most visible (former) employees. Former deputy chief investment officer Daniel Ivascyn -- now serving as Gross's replacement as Pimco's chief investment officer -- took home a $70 million bonus. Wendy W. Cupps, the global head of product management, garnered $50 million, making her one of the highest-paid woman in finance. (Her rocky push into equities was the subject of well-publicized haranguing by Gross.) Douglas Hodge, now the CEO, took home $45 million of holiday cheer. These giant bonuses almost make the $22 million awarded to Pimco’s president, Jay Jacobs, seem puny.
The top three managers after Gross and El-Erian -- Ivascyn, Cupps and Jacobs -- were rumored to have been behind the coup that sent Gross packing to Janus Capital in September. Next month, free of Gross and El-Erian, these three will have an extra half a billion or so to keep to themselves or distribute to the other managing directors.
Gross’s bonus -- 20 percent of the total bonus pool for 2013 -- places him in a compensation class of his very own. To put that figure into context, in 2013 Gross made just shy of what the next 20 publicly held finance company CEOs made combined.
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How Pimco became such an earnings machine is a quirk.It has been four decades since it was spun out of Pacific Life Insurance Co., a move that was made in part to allow Gross a freer hand to manage the insurer’s fixed income portfolio. Since then, Pimco has grown into a behemoth, in terms of the bottom line and as a force in the bond market.
Much of what we know about Pimco stems from Allianz SE's $3.3 billion purchase of 70 percent of the firm in 2000. A publicly traded German insurer, Allianz has released some details about Pimco’s operations in its quarterly earnings reports. That data, along with mutual fund disclosures and filings, provide hints about the firm’s revenue.
We can estimate earnings by looking at the largest Pimco funds. The 20 biggest have an average fee of about 61 basis points. Let’s lower that to account for discounts given to large institutional clients, and we get a rough estimate of about 50 basis points. On $1.82 trillion dollars, that yields $9.1 billion in revenue a year.
Pimco is, by any measure, a fabulously wealthy company. Using my back-of-the-envelope revenue estimate, it generates far more revenue per employee than any bank or asset manager -- almost four times as much as Goldman Sachs.
The bonus structure is a quirk of that original deal: Allianz’ partial purchase left Pacific Life owning 30 percent of Pimco. But Pacific Life wasn't interested in running the asset-management business and even after the Allianz deal, everyone involved continued to defer to Gross’s financial and managerial judgment.
Thus Pimco -- based in Newport beach, California, and 6,000 miles removed from its majority owners -- remained fully autonomous. Bloomberg View's fee analysis suggests Allianz takes about 70 percent of the total revenue Pimco generates annually (plus or minus a few percentage points). Pimco keeps the rest.
This same deal structure continued even after Allianz purchased the 30 percent of Pimco that it didn't already own from Pacific Life in the mid-2000s. A subsequent restructuring in 2011 saw Gross and his team gain even greater control over the firm. That gave Pimco so much freedom in relation to its corporate parent that, as one analyst described it to Bloomberg News, it appeared as if it was "the tail wagging the dog."
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Part of the reason for Gross's longevity
after the Allianz takeover -- and another element of the firm's enormous
wealth -- is what we might call the "Pimco Premium." Despite being in a
competitive field including giant companies such as Vanguard and
Blackrock, Pimco manages to charge more than the industry standard for
access to its funds and its separately managed accounts.
Why? When competing for business, the firm has had an unbeatable
combination of a long history and outstanding long-term results. (At
least it did, until recent bad bets on rising interest rates by Gross
torpedoed the 1-, 3- and 5-year record of the flagship Total Return Fund.)Pimco also became the go-to company for the Federal Reserve and U.S. Treasury in many of the credit facilities used to combat the continuing economic fallout from the financial crisis. Pimco's success in the federal government's program to jumpstart consumer lending and a variety of mortgage-backed security programs added more luster to its reputation. Gross even managed to buy up lots of MBS's before the Fed officially announced the programs. Shareholders of the Total Return Fund netted about $10 billion from its mortgage plays.
Beyond the sheer size of Pimco's bonuses, there are other aspects of its compensation practices that should give pause to everyone involved in institutional asset management.
For one, Pimco has been part of a publicly traded company -- Allianz -- for the past 15 years. Unbeknownst to Allianz's shareholders, employees of one of its business units have been paying themselves these extraordinarily large sums of money.
In the U.S., it is hard to imagine $1.5 billion in spending on anything not being disclosed. Almost 16 percent of Pimco's revenue is a “material” amount of money that would normally require disclosure in the U.S. But Allianz is a German company, subject to different regulations.
Another item worth noticing: Pimco investors represent pension funds, foundations, charitable trusts, 401ks and other retirement accounts. Pimco's enormous, self-paid bonuses come right off of the top of the returns those outside investors might otherwise receive.
In a recent Allianz presentation following Gross' departure from Pimco, the firm's new chief executive, Doug Hodge, stated, “We don't comment on matters of compensation.”
But while Gross may be gone, the high fees and compensation structure at Pimco appear to remain firmly in place. Allianz doesn't seem inclined to change things -- it started a $279 million award program this fall to keep people from following Gross out the door.
However, if there is going to be change, it can only come from Pimco's big institutional customers. Why should they pay a Pimco Premium? Pimco's profits are down by 7.9 percent in the third quarter of this year, and the firm saw saw almost $50 billion in outflows last month. Janus, Gross's new home, has managed to attract only about $430 million in new money since he joined.
The market for fixed income asset management has never been in greater flux than it is today. The realignment of power among bond managers is only just beginning. If ever there was a moment when investors could demand more competitive fees from their bond managers, it is now.
Perhaps it might also be a good time for Pimco itself to consider slicing its fees. Anecdotally, stories abound of Pimco institutional salespeople offering steep one-year fee discounts as a way to retain assets.
If I were managing Pimco (even from 6,000 miles away), I would be looking at ways to make those fee reductions more permanent. I bet I even could find close to a billion and a half dollars in savings.
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