We shouldn’t put up with fund managers’ excessive ‘performance fees’

I’ve written here before about the shockingly ludicrous amount of money we consistently pay our chief executives. Sadly, there is a long way to go before common sense even begins to be restored.

The excellent Margareta Pagano, writing in the Independent on Sunday, points to Irene Rosenfield, the chief exec of Kraft. She is being paid a $2.1m cash award for her work last year.

That sounds like a lot. And it is. But it is also only the icing on her cake. Overall she is being paid “a whopping $19.1m”. The cash award is sort of a bonus, in that its payment should have been related to Rosenfield hitting her targets. However, as it happens she didn’t meet them all. But she got the loot anyway because she improved the ‘talent pipeline’ of the company by persuading people from Cadbury to stay on after Kraft’s disappointing take over of the firm.

This, as Pagano rightly says, “takes the biscuit” as a defence for overpayment. After all, what is the point of Rosenfield? Surely getting people to stay on it part of her job? It is what her salary is paid to her for. So on what possible basis should she be paid more for doing it?

Sadly, the idea that a basic salary is mere pocket money and that any actual success in a job should mean oodles of extra pay isn’t just endemic in the corporate world. It is all over the financial sector too.

We’ve long had to put up with paying high fees for everything under the sun (from overdrafts to unit trusts) so that the upper echelons of financial workers can live free of the money worries that plague the rest of the population. But now it looks like we are to be expected to start paying performance fees on funds too.

According to the FT over the weekend, in the run up to the approaching ban on commission as part of the Retail Distribution Review (RDR), all sorts of funds are busy adding performance fees on top of their already overly high management fees.

The idea is that this allies the interests of the fund manager with those of his clients. The more money he makes them the more money he makes too. But this is pretty disingenuous stuff.

In general, the more money a fund manager makes for his fund, the more money he (or his firm) makes anyway. Why? Because the fund gets bigger, and the annual management fee is charged as a percentage of the funds under management.

But the idea that only a performance fee aligns everyone’s interests rather begs the question of who a fund manager feels he is aligned to without one? Surely doing as well as he can to make money for the fund’s investors is part of the deal he makes when he takes a job as a fund manager in the first place? So why should the investor have to pay more if he succeeds (given they’ve already paid for him to do his best to do so via the management fee?).

If he took no management fee at all, or even a very low one, and added in complicated high water marks and so on, a performance fee might just about be a position a manager could argue. But that’s not usually the case.

So just like it is part of Rosenfield’s job to make senior management feel like they want to stay on, it would seem to me that it is part of a fund manager’s job to manage funds without being paid extra to do so.

I don’t often find myself aligned with IFAs, but I see that in a survey done by Skandia, 50% of them say that they will pull client money out of funds that add performance fees on top of high management fees. Good.