Tim Hodgson, who leads the Thinking Ahead Institute, in a new study written in his personal capacity that was seen by Financial News, argues that bonus payments to managers worked against the interests of end-clients, such as pension funds.
Hodgson wrote: “We now have a high-wage, high-margin industry which demonstrates the seller has been able to set a high price. To improve the client value proposition, either the wages or the margins need to give a little.”
He added: “I believe the current structure of compensation in our industry is unsustainable.”
Hodgson’s views chime with those of his Willis Towers Watson colleague Jeremy Spira, who said in May that fund managers had to do more to justify their pay. He told FN at the time: “Managers are able to pay their staff handsomely and still achieve high margins and this is, by definition, funded by their clients.”
In his report, Hodgson said managers had grown to expect 100% of their target bonus and pointed out that that even when reduced amounts were paid, they were not always earned – such as during the financial crisis: “Pay is not as variable as it would appear.” He asks: “Why do we have to pay someone a bonus for doing the job they are already paid for doing?”
He favoured a move to fixed pay, which would provide managers and clients with certain returns, in good times and bad. He pointed out that managers could be offered an opportunity to invest their fixed pay in equity in their firm, to leverage their exposure.
Willis Towers Watson not only holds sway as an adviser to institutional investors with $ 2.2 trillion to invest, but is a $ 75 billion asset manager in its own right. In April, it suggested that performance fees could also be dropped in favour of fixed payments.
New ways of approaching pay are gathering steam among some high-profile names in the UK’s investment industry.
The renowned UK fund manager Neil Woodford said in August that he would stop paying his fund managers bonuses in favour of flat salaries – a move applauded by Hodgson in his report.
A similar approach has been adopted by People’s Trust, an asset management group launched on October 23 by former Investment Association chairman Daniel Godfrey. The group, advised by Willis Towers Watson, intends to take long-term investment approach, also favoured by Hodgson.
Hodgson is not against high pay but said that managers could be incentivised in a way that makes more sense to clients.
Hodgson pointed to studies of human behaviour, which show that annual bonuses are not necessarily the best motivator: “Do you want to employ a firm where people are passionate about what they do – in which case they don’t need a bonus – or a firm where people are motivated by the pay cheque?”