The group, founded by renowned investor Neil Woodford in 2014, has said it will pay its fund managers and marketers through a flat-salary structure, incorporating benefits such as pensions, medical care and life assurance.
Craig Newman, its chief executive, said the firm wanted to challenge the status quo: “There is little correlation between bonus and performance and this is backed by widespread academic evidence. Most studies conclude that bonuses don’t act as a motivator, as expectation is already built in.”
Consultants polled by FN could not think of another manager paying its staff through this kind of structure and admitted the move had raised eyebrows in the City of London.
Andy Barber, manager researcher at consultant Mercer, which advises pensions funds with billions under management, declined to comment specifically on Woodford’s firm but said: “As a generality we would prefer to back managers personally incentivised through well-structured bonuses, rather than a flat-pay structure.”
The head of marketing at one large UK fund manager, said asset management groups that paid bonuses are protected during the hard times when payments are phased out.
This point was also raised by Sam Gervaise-Jones, head of client consulting for the UK and Ireland at investment consultants Bfinance, who added: “If the base salary needs to rise significantly to offset the lack of a potential bonus, does this mean that in the bad times you get a situation where the fund manager does not share the pain? We would want to look at that.”
Gervaise-Jones said he was sceptical but not hostile to the idea.
The question of whether bonuses incentivise strong performance or short-termisim has come into sharper focus across finance – and the wider business world – in the years since the collapse of Lehman Brothers.
The 2015 National Management Salary Survey found that 45% of underperforming senior managers received a bonus.
In the 2016 book What They Do with Your Money: How the Financial System Fails Us, and How to Fix it, David Pitt-Watson, fellow of the London Business School, argued that director bonuses can lead to hyperactive behaviour. “Incentives usually reward those who achieve short-term benefits that benefit the firm, rather than long-term value creation,” he wrote.
But the head of marketing at the UK fund manager said: “We believe bonuses can provide incentives to maximise client returns. In our case, it takes the form of bonuses deferred for three, or five years, invested alongside clients.”
Investment consultants have been putting pressure on the fund management industry to justify the way it does business. On May 16, consultant Willis Towers Watson said managers need to work harder to justify their pay in an era of low returns. But this fell short of a call to ban bonuses.
The decision to scrap bonuses is not the first step taken by Woodford Investment Management this year to move away from the status quo in fund management. In April, it became one of the first asset managers to say it would pay for the cost of investment research out of its own pocket, rather than charging its clients.
Woodford Investment Management oversees assets worth £14.3 billion, according to its website.
Additional reporting by Mark Cobley