Top fund manager Neil Woodford scraps all staff bonuses at his investment firm
- Woodford Investment Management has scrapped staff bonuses
- Prime Minister Theresa May has outlined plans to curb 'irresponsibility'
- Chief executive of Woodford's firm says bonuses are 'ineffective'
Star stock picker Neil Woodford's firm Woodford Investment Management has taken the unprecedented step of scrapping bonuses for all its 35 members of staff.
The move comes as Prime Minister Theresa May last month announced plans to crack down on 'corporate irresponsibility' by giving shareholders a binding vote to block excessive bonuses.
Craig Newman, chief executive of Woodford Investment Management, said the decision to axe bonuses was based on the belief that 'bonuses are largely ineffective in influencing the right behaviours.'
Changing times: Woodford Investment Management has scrapped bonuses for all its staff
Since April, Woodford Investment Management has been operating a single salary pay structure, with a flexible employee benefits scheme.
Mr Newman 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 have implemented a remuneration scheme that is fair and appropriate for Woodford employees and, ultimately, clients. Drawing on our experience of various bonus-led remuneration models, 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.'
In the UK finance sector, bonuses are widespread and the majority of high-flying staff in the industry expect them.
Woodford Investment Management's step to scrap bonuses is an unusual and radical step in a different direction.
Shifting the status quo: Co-founder and head of investment at Wood ford Investment Management, Neil Woodford
Alice Leguay, co-founder and COO of Emolument, told This is Money: 'In my view, this decision is a very interesting step in providing more transparency when it comes to pay in the financial sector by removing the black box element that is the discretionary bonus element of pay.
'Bonuses create frustration, distrust, and paranoia amongst financial professionals – a huge distraction from value production for investors and shareholders and at the source of much politicking and rifts amongst co-workers.
'Knowing exactly how much they are working for will most likely focus employees on the job at hand, as well as provide a predictable fixed-cost base for the company.'
In the pipeline: Prime Minister Theresa May has outlined her plans to tackle 'corporate irresponsibility'
Laith Khalaf, a Senior Analyst at Hargreaves Lansdown told This is Money: 'Paying higher salaries in lieu of bonuses increases a firm’s fixed costs, so they may not be able to cut their cloth so effectively in the event of a downturn.
'It also may make retaining staff more difficult as may bonuses work on a deferred basis- so staff have to wait to get them. These are probably lesser issues for Woodford Investment Management right now, as it is a new group with a relatively small number of staff, and an extremely popular fund offering. Indeed I suspect there are plenty of investment professionals who would actually take a pay cut to work alongside Woodford.
'By contrast bonuses can be withdrawn in times of hardship, and can be rolled over to incentivise staff to stay. They can also be linked to the performance of the fund, which aligns the incentives of managers with those of investors, although one could argue this can make managers more short term, because performance is often judged over one and three years.'
Since 2014, the European Banking Authority has imposed a cap on bankers' bonuses in the UK and across the EU, meaning they are limited to 100 per cent of a banker's salary, or double their salary with shareholder approval.
On Britain's Brexit vote, the EBA's bonus cap could come unstuck, much to the delight of UK officials and businesses vehemently opposed to the scheme.
But, Prime Minister Theresa May has already revealed her plans to crackdown on 'corporate irresponsibility' in the UK by making shareholders' votes on pay binding.
At present, shareholders can be over-ridden even if they vote that a pay deal is too generous.
Mrs May also plans to overhaul corporate governance structures by forcing companies to appoint employee representatives to boards.
Earlier this month, data from the High Pay Centre revealed that the bosses of Britain's biggest public companies raked in an average of £5.5million last year, having enjoyed a 10 per cent pay rise, while other employees see their pay stagnate.