UK Fund Manager Ditches Bonuses, Saying They Encourage Bad Behavior

A top fund manager in the UK is getting rid of bonuses at his firm and switching to flat salaries instead, the Guardian reports:

Neil Woodford is putting all staff at Oxford-based Woodford Investment Management on a flat salary this year. His move won support from another senior figure in the fund management world, Daniel Godfrey, who said his new venture will not pay bonuses. … Craig Newman, chief executive of Woodford Investment Management, said: “While bonuses are an established feature of the financial sector, Neil and I wanted to take the opportunity to do something different that supports the firm’s culture and ethos of challenging the status quo.

“We concluded that bonuses are largely ineffective in influencing the right behaviours. There is little correlation between bonus and performance and this is backed by widespread academic evidence. Many studies conclude that bonuses don’t work as a motivator, as expectation is already built in. Behavioural studies also suggest that bonuses can lead to short-term decision making and wrong behaviours.”

Newman’s explanation reflects a conclusion some experts have drawn lately about the pay of CEOs and other executives.

Critics of pay-for-performance systems contend that they perversely motivate executives to pursue short-term gains that maximize their own rewards, at the expense of the organization’s best interests in the longer term. This issue is particularly salient in the finance community, where flawed incentive structures can encourage risky behavior with potentially serious consequences. Earlier this year, US regulators proposed new rules limiting how bonuses should be paid to finance executives intended to discourage excessive risk-taking.