Massachusetts Financial Services Case Analysis

Massachusetts Financial services Case Analysis

(A) Position Statement:

Massachusetts Financial Services is an investment management company started in the year 1924. The creation of the Massachusetts Investors' Trust in Boston now known as Massachusetts Financial Services (MFS) heralded the arrival of the modern mutual fund in 1924. The case describes the compensation and  performance management system at MFS. The company follows a subjective based compensation system for its employee. The senior management team introduced hedge funds at the firm, and it is a great opportunity to bring higher revenue. On introduction of hedge fund, the key problem management is facing is - How to compensate the Hedge fund manager. The question arises, will the typical hedge fund manager pay which is 20% of the upside harm the MFS culture of  camaraderie. Also if they pay hedge fund manager  on a prevalent subjective system, can they retain the hedge fund managers especially after an incident where 2 top performers in hedge fund left the company to start their own firm, in less than year the fund was made available to public. The company has closed down the hedge fund available to domestic institutional institutional investment as it saw half of its hedge fund outflow with the exit of Stack and his f ormer MFS Colleague. Mark Regan MFS veteran employee is chosen as the new manager and is heading current hedge fund which is available for offshore investors (B)Problem Essay: In 1924 the firm introduced mutual fund to its client by giving them opportunity to   purchase and redeem share on demand. MFS was able to successfully achieve its first vision plan to capture the market well within the time frame & became the top player. At that time the asset was $30million. During 1970-80, Fast growing companies like Fidelity and Putnam enter into the business aggressively. MFS fell from its position and subsequently were out of top 10 companies. This happened due to conservative investing & distribution style of the firm. The ³new generation´ leaders of MFS Company brought energy and excitement to MFS as they  promoted the vision of making MFS a larger & more diversified firm. The new leaders pushed strategic idea such as aggressive entry into the institutional market. With mutual fund they included fixed and variable annuities, separately managed accounts of institutional institutional money management, ma nagement, international product and retirement plans. In 1990 the desire for exponential growth and to regain the market they entered into institutional market. By pushing the strategy towards the institutional market Mr. Shames was able to build the reputation again. In the same year the total assets under institutional market were $31 billion with over  $6.4 billion in new institutional accounts. So by 2001 MFS had over $140 billion of asset under  management with pre-tax net earnings of $300 million. Firm had strong believes in its cultural values and the anti star system. system. The compensation comp ensation strategy for portfolio manager includes salary, bonus & equity in MFS. They highly believe in subjective  performance evaluation for the determination of compensation. The bonus for each manager was based on 3 factorsThey are Fund performance Contribution to the investment process Contribution to MFS overall The objective performance constitute of 60% whereas subjective performance was given 40%. They follow 360-degree feedback evaluation method and used a relative benchmark for deciding the bonuses. Due to heavy use of subjective evaluation the year to year pay variance at MFS was slightly lower than  pay variance at competing investment investment firms. y y y

Since 1998 company is having internal hedge funds. It is now looking for greater opportunity to increase its revenue by introducing hedge fund to the public. Earlier everything was ok with internal hedge fund but the actual problem begins when two of the fund manager left the organization and half of  the employees were not agree to bring hedge fund into the market. Mr. Stack left the company to start his own hedge fund. Company need to look for eligible hedge fund manager. Another issue raised is the compensation strategy for hedge fund manager. MFS employees were objecting the new compensation strategy of paying fund manager according to the business they make in hedge fund. They believe that it will destroy culture and reward system of the company. (C) Decision Essay: Recommended Decision: In our opinion MFS should proceed in hedge fund business by forming it as a separate entity as subsidiary of MFS (Parent company). After forming hedge fund business as subsidiary of parent company MFS, it should introduce a separate compensation model for it. The compensation model we recommend is in similar line of current performance metric but a lesser weight of  around 10-15% should be given to subjective evaluation and major chunk of weight will be given to objective i.e. Fund performance. This will help the company leverage the strong market of revenue earning opportunity in hedge fund without contradicting the current culture. The model will also bring a satisfaction for hedge fund manager as they will be compensated in similar level to what hedge fund manager at other company is paid. There were few decision options which we thought before reaching to the final decision: 1) A common compensation model for hedge fund manager with common bonus pool i.e. the traditional way which involves subjective evaluation. 2) A separate compensation model for hedge fund manager. 3) Exit from the hedge fund business. 4) Formation of subsidiary company for hedge fund and develop a separate compensation model for  them. The company should refocus on its domestic hedge fund investor too in this model. Decision Criteria: We kept in my mind while deciding several options: 1) Hedge funds are very fast growing business and company has lots of opportunity to earn revenue. In exhibit 1, company performance in 2001 has declined to $147 billion compared to $121.7 billion in 2000. Its high time company needs to keep growing its size. 2) It¶s common that a successful hedge fund can give at least 20million$ of revenue. 3) Retention of hedge fund manager by competitive compensation model, benchmark as per the market. 4) Hedge fund have can bring revenue to the company even when the equity market is not doing well. Market perspective: The Company is not able to grow much in its revenue in its current business and hence it should go aggressively in hedge fund market. The hedge fund market is currently a high growth market and it can be an essence of growth for the company. Hedge fund can bring revenue even when the market is not doing well. So we eliminate 3 rd decision option of exiting from the market and select for 1st decision option as mentioned earlier. Compensation perspective: Generally Mutual funds manager are paid remuneration based on a percent of assets under  management. Hedge funds usually remunerate managers with performance-related incentive fees as

well as a fixed fee. Mutual fund revenue is largely based on the market performance factor but hedge fund is based on the intellectual of manager as it can bring revenue even when the market is not doing well. We can pay the hedge fund manager in the traditional subjective based on subjective evaluation and a common bonus pool but in this scenario hedge fund manager are not being paid for their worth and there is difficulty in retention of fund manager with this model as already seen 2 top performer  leaving to form their own company. In another decision option, we can have a separate compensation model for hedge fund manager but this can bring conflict as it¶s seen there was already a lot of  whistle blowing incident. This model can really go blunt and destroy the culture of MFS. Since on this context, we also eliminate decision option 1&2. A pparently it shows that we can grow the company to a large extent by getting into this business, however citing various cultural issues in relation to compensation, the best way is to go for  subsidiary based model with a separate compensation plan for hedge fund manager. We also recommend a low 10-15% weight for subjective evaluation in the compensation model for the subsidiary company; so that some part of the culture of parent company is imbibe there too. Action Plan, Outcome desire: Growth in the revenue of MFS. Retention of hedge fund manager. y y

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To start with the subsidiary model they should first get an approval from MFS parent company to form a subsidiary for MFS. After the approval, they should file a registration for a subsidiary with the registrar of the company. Now will be the employee of the newly formed subsidiary company: Recruitment and Selection:   New Employee: The company should start recruitment and selection mostly from outside the o company based on it assessment which will fit in the new organization. It should focus on recruiting maximum from external source as the current employee may not fit in the new organization and also selecting same set of employee may create the same problem even in the newly form company. Present Employee: The Company should also give opportunity to a specified number employee to o   join the newly formed organization based in certain criteria. It should clearly communicate to them about the compensation model at the newly formed organization. They should also give an opportunity to come back to parent company incase after few months of experience they don¶t fit the culture there. Training: The organization should impart an extensive training to that employee who joins from the  parent company. The skill set required at the parent company is different compared to hedge fund market, so they need to develop them to the desired level.

(D)Conclusion: By using the Subsidiary cum separate compensation model, the company will be able to do away from the cultural conflict of compensating the hedge fund manager. At the same time they will also be able to retain hedge fund manager by paying competitively as per the market. The biggest achievement for the management will be growth in revenue.

Submitted by: Nayan Manik Tripura (P10X05) Piyusha Baghel (P10X03)