A top asset manager is scrapping bonuses because they're 'largely ineffective'

Woodford Investment Management, a firm with £14 billion ($18.4 billion) assets under management, is scrapping employee bonuses in favour of salary rises.

Bonuses encourage “short-term decision making and wrong behaviours,” Craig Newman, chief executive and co-founder of the company, said according to a report in The Guardian.

The firm, set up in 2014 by star-stock picker Neil Woodford, has 35 staff.

“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,” Newman said.

“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,” he said.

Woodford’s main fund has done well in a difficult period for investment managers, returning 16% in 2015, compared with 6% for the average fund. Over the past year it is up 8% compared with the industry average of 6%, according to The Guardian.

It is not the only financial firm to turn its back on the tradition of paying large annual bonuses. Daniel Godfrey, a former chief executive of the trade body for UK fund managers, won’t pay bonuses to executives at his new fund.

“I don’t want to demonise bonuses full stop, but there are areas of the economy where pay is objectively too high but when you are in an arms race it is hard to stop it,” Godfrey said in The Guardian report. “There are areas where pay should come down, but how you get there is another matter”

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