Top fund manager Neil Woodford scraps staff bonuses

One of the UK’s most respected fund manager is to scrap bonuses at his firm, in a challenge to the conventional City wisdom that bonuses are essential to motivate staff.

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.Fund management groups have until now been among the most aggressive payers of large bonuses, arguing that they are crucial for performance. In 2013 and 2014 M&G paid about £33m in total to just one fund manager, Richard Woolnough. One of Woolnough’s funds, M&G Optimal Income, is now languishing in the bottom half of the performance tables.

Woodford dismisses bonuses as “largely ineffective” which can lead to “wrong behaviours”.

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.”

To soften the blow of cutting bonuses and to make sure staff are not hit by an effective pay cut, Woodford has given them a pay rise for the current financial year. The firm said that by paying a single salary, it will improve employee behaviour and performance – arguing that bonuses are a distraction.

Woodford’s firm will be joined by Godfrey’s new fund. Godfrey, the former boss of the Investment Association – which includes all the major City asset management groups – admitted that pay levels and bonuses in the industry are too high. He said: “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. There are areas where pay should come down, but how you get there is another matter”

He wants fund manager groups to be more forthcoming in explaining pay levels, and in his own new venture will be paying just a basic salary and a very long-term shares package.

Woodford has linked the change in pay structure to numerous academic studies which have indicated that bloated pay packets at big corporations and among fund managers do not result in better outcomes for investors or customers.

Killing Conscience: the Unintended Behavioural Consequences of Pay for Performance by Lynn Stout, found that the more that chief executives get paid, the worse their companies perform over the next three years.

Stout found that workplaces that rely on bonuses promote selfishness and opportunism, with the end result more uncooperative, unethical, and illegal employee behaviour.

Traditionally, fund manager pay is linked to performance against a particular target or benchmark – such as beating the FTSE All Share index by 1% or 2%. But in another challenge to conventional wisdom, Woodford does not operate according to benchmarks, preferring to pick and hold stocks according to their fundamental value rather than their relative performance against a benchmark.

Launched in May 2014, Woodford Investment Management has more than £14bn assets under management. Its main fund returned 16% for investors in 2015, compared with 6% for the average fund, and over the past year it is up 8% compared with the industry average of 6%.