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

published 23 August 2016

16-8-23-athletes-1200 — Athletes have more straightforward targets

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).

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).

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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).

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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Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.