The impact of compensation and benefits, excluding expenses added back in our calculation of adjusted operating income, had a negative impact on adjusted operating income compared to the prior-year period across 2023 and into the first quarter of 2024.  

• Compensation and benefits had a negative $40.2 million impact in the first quarter of 2023 compared to the prior-year period.
• In the second quarter of 2023, the impact was negative $32.6 million (excluding $4.0 million in severance related to targeted reorganizations).
• In the third quarter of 2023, the impact was negative $26.7 million (excluding $5.0 million of severance related to targeted reorganizations).
• In the fourth quarter of 2023, the impact was negative $29.9 million. 
• In the first quarter of 2024, compensation and benefits had a smaller, but still negative impact of $6.9 million, compared to the prior-year period. 

We engaged in targeted reorganizations in the second and third quarters of 2023 and substantially completed the reduction and shift of our China activities in the third quarter of 2023. As a result, headcount declined 1% as of September 30, 2023, compared to September 30, 2022, and declined 7% as of December 31, 2023, compared to December 31, 2022. However, given the timing of these actions, average monthly headcount increased 3% in the third quarter of 2023 compared to the prior-year period, contributing to higher compensation costs in the quarter. 

While we would expect lower headcount to have a negative effect on total compensation, several other factors contributed to higher compensation costs in the fourth quarter of 2023 and also helped drive the increase in the third quarter. Bonus expense increased in both quarters and was responsible for a little more than 40% of the increase in the fourth quarter of 2023. In general, we saw better performance compared to targets in the second half of 2023 compared to the second half of 2022 when we experienced relatively soft results compared to targets. In both quarters, higher compensation and benefits included the impact of merit increases primarily implemented in January 2023, and a rebalancing of certain sales plans between commissions and salaries. Finally, we saw a modest shift of our employee base to countries with higher labor costs with the substantial completion of the reduction and shift of our China activities. Proportionally, the U.S., Canada, and Europe all accounted for a larger share of our employee base at the end of the year. At the same time, we also saw an increase in the proportion of our employee headcount in India, where labor costs tend to be lower than what we see elsewhere in our global footprint. 

We’ve provided a breakdown of the key drivers of the increase in compensation and benefits of $29.9 million in the fourth quarter of 2023 and $129.4 million for FY 2023 below. This excludes expenses added back in our calculation of adjusted operating expense and $9 million of severance related to targeted reorganizations in certain areas of the business in 2023: 

• Higher bonus expense accounted for $13.3 million of the increase in the fourth quarter and $19.7 million of the increase for the full year 2023. This was driven by higher average monthly headcount in the first nine months of the year, as well stronger performance relative to targets in the fourth quarter of 2023 compared to relatively soft performance relative to targets in the prior-year period. 
• Merit increases and the associated increases in benefits accounted for $8.6 million of the increase in the fourth quarter and $38.3 million for the full year 2023.
• Compensation costs associated with the June 2022 acquisitions of Leveraged Commentary & Data (LCD) and Praemium contributed $11.8 million to the increase in compensation and benefits in 2023. Given the timing of these acquisitions, the increases were isolated to the first half of the year.
• The remaining $8.0 million increase in the fourth quarter of 2023 was driven by multiple factors including the rebalancing of certain sales plans between commissions and salaries. For FY 23, the remaining $59.6 million increase in compensation costs was primarily driven by higher average monthly headcount in the first three quarters of the year and also reflected the rebalancing of certain sales plans.