Compensation costs as a share of net revenues have risen in assset management, a new PwC report says, adding to recent evidence of a margin squeeze in wealth management in recent years.

Compensation costs as a percentage of net revenues increased by 4 percentage points over the last financial year across all firms surveyed in PricewaterhouseCoopers' annual asset management report. At the same time, 63 per cent of firms experienced a fall in profits compared with the 2008-2009 year.

To achieve this figure of 4 percentage points, surveyed firms were divided into quartiles by their total compensation spend as a percentage of net revenues; each quartile then saw an aggregated rise of 4 percentage points.

The report highlights how financial services are feeling the pinch more than two years after the financial panic of 2008. In the private banking sector, margins have also been squeezed after a period of relatively stagnant new business inflows and rising regulatory-related costs. The squeeze may help explain why firms have in some cases sought economies of scale via mergers and acquisitions.

Due to falling profits and rises in the bonus element of compensation, annual bonus spend as a percentage of pre-bonus operating profit advanced substantially, and was up by 9 per cent for a typical firm and as much as 20 per cent for the firms which spend the most on bonuses as a proportion of pre-bonus operating profit, PwC said.

“After salary freezes in many firms over the last few years, asset management companies have been under pressure to correct seemingly suppressed pay levels to avoid losing talent as the recruitment market picks up. This investment comes at the expense of immediate shareholder return but firms clearly believe it will pay-off in the longer term,” says Tim Wright, remuneration director at PwC.

Compensation costs are being driven by upwards pressure on base salaries, the report says. It attributes this to changes in the banking sector, where the balance is tipping towards the salary component of overall compensation to reduce excessive risk-taking.

“Ultimately asset management and banking share much of the same talent pool and new hires expect base salaries to be aligned. This in turn is pushing existing employees to demand pay hikes as they notice market rates have increased,” says Wright.

However, at the same time, 40 per cent of asset management firms increased bonus pools last year while only a third reduced their bonus spend.

More than 50 per cent of firms amended their bonus deferral schemes, with changes, as in the banking sector, tending to increase the deferred proportion of the bonus and widen the group of employees partaking in the deferral scheme.

“Around half of survey participants have also made changes to the use of long-term incentives, with a significant shift towards basing these on multiple performance conditions rather than a single performance measure,” PwC said.

The report is based on interviews with and data from 22 "well recognised" asset management firms.