Merryn's Blog

Why we need to give bonuses to Olympians, but not to fund managers

Give athletes funding and they will go after glory. But when it comes to fund managers, says Merryn Somerset Webb, it gets a little more complicated.

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Give someone one clear target and the means to meet it and you sharply increase the chance that they will meet it. That's good if the target is the only thing that matters (as, perhaps, is the case with Olympic medals). It isn't good if the best outcome is a more complicated business (as, perhaps, is the case if you run a business or an investment fund).

The point of training for the Olympics is to be the best at something and to win a medal. The point of running a company is not just to announce that you have beaten analyst estimates at every quarterly results meeting. Your targets are many and varied.

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You want to keep your pension fund solvent. You want to train and retain good staff for the long term. You want to treat your suppliers in such a way that they won't let you down. You want to make sure you have enough working capital, healthy cash flows and not too much debt. And of course you want to be sure that all those things feed into a solid long-term return for your shareholders (even if you aren't around for the long term).

The same goes for fund managers. You want to create income. You want to be sure you see long-term capital growth. You want to make some effort to ensure that the companies you invest in behave well and of course you want to make money for your own company via the fees you generate. Putting all this in a target is tough. It is also at best pointless (there is little evidence that bonuses make people work harder or better) and at worst destructive (there is quite a lot to suggest it makes them work worse).

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Good news, then, that the founder of Woodford Asset Management, Neil Woodford, has decided to scrap staff bonuses at the firm on the basis that they are nothing more than a "distraction".

Given how new the firm is, how old the research on this matter is, and how carefully Woodford appears to think about the structure of this kind of thing, I'm mildly surprised that Woodford Asset Management ever set itself up to pay the bonuses it is scrapping in favour of a "fair and appropriate" alternative (no one will suffer here salaries are rising such that everyone will still get much the £225,000 average as they did). But still, it's a nice example to the rest of the industry albeit one I'm not expecting many of them to follow.

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