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Sep 16, 2021

The Insurance Industry’s Generational Talent Dispersion [Part 1]

Steve Buonpane

Steve Buonpane

Co-founder & CIO

Part I

I began my insurance career 18 years ago as a largely clueless underwriting trainee on the 6th floor of AIG’s 175 Water Street building in downtown Manhattan. Reflecting on these 18 years between AIG, Chubb, and now Shepherd, I have a tremendous sense of gratitude and appreciation towards the insurance industry - especially in what it has afforded me in professional and personal development as well as the many connections made along the way. I’m also extremely fortunate to have been provided numerous opportunities and broadened roles throughout my career by the respective organizations and managers I’ve worked for. I would consider many of the promotional opportunities “stretch roles” given my experience level and expertise (lack thereof) at the time they were offered.

I was trusted to grow and develop into these roles while also growing and developing teams along the way. Yes, I put in the work required and showed the willingness to do so throughout my career (that is to say these were not roles that were just simply handed to me). But most importantly, the opportunities were present.

Each of our careers - be it what we make of them - is largely a function of work ethic, talent and opportunity.

I am so grateful for the roles and experiences I’ve had to date, and especially so to the leadership at AIG and Chubb for trusting me with the important strategic decisions to move our business and teams forward. And quite honestly, granting me enough space to fail if necessary to allow for lessons to be learned and for my confidence to develop. I’ve made my share of mistakes across each role I’ve taken on, and it’s those moments that have shaped the leader I am today and will continue to do so as my career evolves. I wouldn’t be where I am today without the presence of those opportunities and the many ‘teaching moments’ that came along with them.

Diminishing Opportunities for Millennials and Zoomers

When I joined Shepherd 5 months ago I wrote about how the construction and insurance industries were at a critical inflection point as it pertains to the use of technology and data. I will also add that the established organizations in the traditional insurance and financial sectors are at another inflection point as it pertains to their key and emerging talent, and in being able to offer their talent the breadth of professional growth opportunities that many should be pursuing.

Why? Simply put, the career growth trajectories are shrinking within legacy institutions. The opportunities, such as the ones I have been fortunate enough to have early in my career, are fewer and farther between.

There are a number of macro and micro factors that contribute to this, especially given where many of the established companies are generationally and demographically. Two macro factors I will touch on here:

  1. Low retirement rates, specifically within the Baby Boomer generation.

  2. Corporate bonus structures (and US tax policies) disadvantage younger employees.

Both of these factors are contributing to reduced opportunities as well as a widening generational wealth gap.

The average retirement age in the US has risen steadily since the 1980’s. Credit advancements in healthcare, growing life expectancies, the rise of the US’ services-based economy and of course the higher qualifying age for social security benefits. Experienced workers tend to hold more senior positions, and as a result are compensated higher than the average employee and hold more equity within the respective companies they work for. As should be the case. But every corporation has a limited amount of resources it can deploy to meet its business goals, and so naturally this dynamic of slowing retirement rates amongst the Boomer generation - which until last year was the largest generation in the country - creates a blockade when it comes to advancing the younger generations into more senior roles. This doesn’t only impact Millennials and Zoomers, but the smallest generational cohort as well - the Gen X’ers - who are just taking on, or about to take on more senior executive roles.

To be clear, I’m not suggesting that it’s time for the Baby Boomers to ‘get out of the way’ as there is much to be gained from the knowledge and experience this generation possesses. And while there is evidence that retirement rates have increased as a result of the recent pandemic, there is a deeper and more alarming trend that has taken place over recent years within the traditional ‘white-shoe’ institutions - which relates not only to shrinking career growth opportunities, but shrinking relative compensation as well.

According to the Bureau of Labor Statistics, real average hourly earnings for employees, seasonally adjusted, has decreased in 9 of the last 12 months, including a 0.5% decrease from May to June ‘21, and another 0.1% decrease from June to July ‘21.

This trend over the past year can be attributed to pandemic-related slowdowns in some cases, as well as the recent inflationary pressures in the US. Though real wages have certainly grown over the past 40 years, these increases are disproportionately skewed towards the top 1% of earners.

As per the Economic Policy Institute:

earnings-chart


At the same time, the growing trend in dividends and stock buybacks has been evident, especially since the ‘08-’09 financial crisis. The growth in stock buybacks has been much more pronounced. In the 1st quarter of 2021 alone, more than 2/3rds of the companies listed on the S&P 500 conducted share repurchases, equating to over $302 billion of shareholder return through buybacks.

While stock buybacks are an effective means of increasing shareholder wealth if there is no better use of capital (albeit short-term measures at the expense of long-term innovation), it also has the effect of inflating compensation for employees with restricted stock units (RSUs) and/or Incentive Stock Options (ISOs).

This isn’t an earth-shattering revelation, however take into account the following added dynamics as we come out from under the pandemic:

  • According to a late-2020 survey conducted by the insurance and consulting firm Gallagher, salary increase budgets shrank almost universally in 2021. With the backdrop of COVID-19, about half of the respondents expected salary increase reductions in 2021, while another 45% expected to suspend salary increases altogether.
  • Yet as we evaluate the S&P data through Q1 (see chart below), dividends and stock buybacks are at near-record highs.
    • There are obvious benefits to owning shares in the company one is employed for - both for the employer and the employee - as it aligns incentives, especially when a portion of annual variable compensation is provided in RSUs and ISOs. However, authorizing stock buybacks at the expense of reducing merit increases incentivizes a company’s executives at a disproportionate level.
  • The average CEO-to-Worker pay ratio increased from 264:1 in 2019 to 299:1 in 2020.
    • 30 years ago this ratio was about 65:1.

To summarize:

  • Salary merit increases are down over the past year.
  • Real earnings are down over the past year.
  • Stock buybacks are at near-record highs and up 100% year-over-year - implying excess capital sitting on corporate balance sheets. The “average” employee is quite literally subsidizing executive compensation.

chart-s&p


To bring this back to the generational problem that exists today, the dynamics of what is described above effectively incentivizes senior level employees to ‘hang-on’ longer - further exacerbating the lack of mobility within these organizations. To be fair this isn’t just an insurance or financial services industry issue, but if these trends continue it will have a damaging effect on traditional corporations in this sector because upward career growth is stunted, compensation is suppressed, authorities are held back, decision making slows and as a result progress will be impeded on a relative basis. This comes at the added expense of not advancing “younger perspectives” for which new, innovative and unique ideas can be put forth.

The shrinking career trajectories are coupled with Millennials being the most indebted generation in history, in large part due to the explosion of higher education costs over the past 20 years. This contributes to Millennial home ownership trailing previous generations (by significant margins). To further push the younger working generations down - we have a tax code that rewards home ownership over renting, and taxes income gained on a stock sale in a given company at a lower rate than income earned from working at that same company.

And so the gap widens.

Scott Galloway, one of my grad school professors at NYU, points out in a recent No Mercy No Malice blog post:

The insurance industry has a great deal of talent bubbling-up within the ranks but there are limited opportunities for upward mobility and wealth creation within the traditional sector, compelling this talent to pursue growth elsewhere.

So where does this talent go?

Click here to read Part 2 - The Insurtech Wave.


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