MFS case

Case facts:-

Massachusetts Financial Services (MFS) is a successful investment management successful which is seeking to maintain a rather different profile as an employer from its principal competitors. MFS has a culture of rewarding teamwork and contribution to the firm in addition to the performance of one’s own fund management. There is a conscious effort to maintain an anti-star culture, which encourages team performance and promoting in house talent rather than recruitment from outside. The process of maintaining this culture begins with recruitment, and is followed up with in the compensation strategy.

The compensation system of the firm gives importance to both subjective and objective parameters. The three main components of the compensation are salary, bonus and equity. The salary was typically a small component of the total compensation. The major portion came from bonus which could vary from half to twenty times of the salary. The bonus is guided by three parameters.Fund Performance: This is based on performance of the firm over a 1, 3 or 5 year period with respect to its competitors. This parameter gets reflected by Lipper ranking of funds which was open to the public’s perusal.The company determined 60% of the compensation package based on this parameter. Since a longer time period was used, the employees did not feel the pinch in their pockets because of low performance of their stocks in a particular or a couple of years.The remaining 40% weightage was placed on the following subjective parametersContribution to the Investment Process: This included subjective parameters like mentoring of analysts, idea generation, information gathering, communication and attitude. Contribution to MFS overall: The main parameters are how supportive has the manager been of the firm’s overall sales and marketing activities of its products, how supportive has he been of the firm’s success.A detailed report is compiled for each portfolio manager on each of the subjective parameters. This is done twice a year to around 60 people per manager, inclusive of seniors, peers and subordinates. So this follows a 360o feedback format. An evaluation form for each portfolio manager is sent to the evaluators. The evaluation form puts a rating on a scale of 1 to 5 for each of these parameters and asks for comments justifying the ratings. It specifically asks the evaluators not to bear the financial performance of the manager while rating him/her. However, in spite of this they have not been able to eliminate the hero-worship factor completely from young analysts who look up to star portfolio managers.Equity is paid to the portfolio managers as a incentive to stay with the firm. If they switch firms they have to sell it back to the company at the price it was given to them. They can only redeem it at the market price if they are retiring or switching professions. Thus the equity helped in creating a sense of ownership among the managers. It also acts as a retention mechanism for the company.

The problem:The compensation system and the culture of the firm are anti-star and focus on teamwork and cooperation. It also focuses on long term returns. Hence, its pay is lower than its competitors but attract talents with its overall package of compensation and relational rewards. The company recruits fresh business school graduates and nurtures them to take up senior positions in the future. It does not believe in lateral recruits.The company plays in mutual funds, which were divided into growth, core and value funds. The strategy that the company uses is betting on these funds on a long term basis. The analysts as well as the research and analysis wing of the company are directed to maintain a long term view and exhibit due diligence while making recommendations. In this situation, hedge funds have arrived as the new opportunity in the horizon. In the current situation when the S&P 500 index has stayed flat over the years and particularly post 9/11, investors

want a quick return on their investments. The returns are extraordinarily high. The company had seen the venture succeed when it incubated three such hedge funds internally. However, managing a hedge fund requires much more individualistic, short term, isolating mentality. It is much more trading based and star system tends to creep in. The company therefore is at crossroads to choose the right strategy. It is does not want a individualistic culture creep into the company, because the people currently with it are in the company for the very reason that this company values teamwork and cooperation. Therefore the company cannot let go of its culture for which it has nurtured for long and has made several sacrifices to hold it up. At the same time, the hedge funds represent a huge opportunity, may be the future. It does not want to miss the bus, like last time when it had refused to look beyond retail investments. After much deliberation, the company launched two funds for domestic and offshore clients. Within a year, the person placed in charge of the funds left with most of the domestic clients to start his own business. The consideration was the higher profit he could keep for himself, as the company was not paying 20% of the profits as was the industry norm. The company now faces the question whether to continue with the hedge fund venture or change its cultures and beliefs? Options and evaluation:-

Assuming the company decides to continue in the hedge fund business, it will have to make some departures from its usual compensation strategies. The industry standard demands that the hedge fund manager gets a 20% cut of upside. However, this is a bonus based simply on the performance of the individual, rather than a