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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 investment as it saw half of its hedge fund outflow with the exit of Stack and his former 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 “new 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 money management, 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. The compensation 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 factors-
They 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 firms.

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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 1
st
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

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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 instit ...
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