Fund manager scrapping bonuses a step in right direction
London Briefing: Bigger City firms unlikely to follow Woodford example
City fund manager Neil Woodford abolished annual bonuses and will instead increase rates of basic pay and benefits for his employees. Photograph: Leonhard Foeger/Reuters
Is this the beginning of the end of the bonus culture?
Neil Woodford, one of the highest-profile fund managers in the City, has abolished the controversial annual payments at his investment management firm and will instead increase rates of basic pay and benefits for his employees.
The surprise move, which caught the financial community on the hop, is not so much because Woodford is concerned that bonuses are intrinsically unfair, nor that they create discord among staff, or even that they enrage the public.
After all, who can forget the furore when the former head of Royal Bank of Scotland, Sir George Mathewson, casually complained 15 years ago that a bonus of £750,000 wouldn’t “guarantee you bragging rights in a Soho wine bar.”
No, it’s much simpler than that – in Woodford’s view, bonuses simply don’t work.
That is diametrically opposed to conventional City wisdom that banks and financial firms are forced to make these lavish multimillion-pound payments each year in order to reward and retain top employees. If the bonuses aren’t big enough, then the talent will simply head for the nearest exit. Or so the story goes.
But Woodford, whose firm has £14 billion of assets under management, challenges that orthodoxy. Explaining the rationale behind the bonus ban, the firm’s co-founder and chief executive, Craig Newman, said there was “little correlation” between the payments and performance, rendering them largely ineffective.
There was plenty of academic evidence to back this up, Newman said: “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 cited one article, from the specialist Journal of Corporation Law, which said financial incentives were counterproductive “as they encourage gaming, fraud and other dysfunctional behaviours that damage the reputation and culture of the organisation”.
They “produce the misleading impression that most people are selfish and self-interested, which in turn erodes trust.”
Another City figure, Daniel Godfrey, is now also planning a bonus ban. A former head of the Investment Association, Godfrey is setting up a new investment trust next year and says staff will be on a fixed salary. Likening the bonus culture to “an arms race,” he said: “There will be nothing more they can do to earn money.”
The move was welcomed by campaigners against excessive pay. Stefan Stern of the High Pay Centre described it as “brave” although he suspects that bigger firms may be reluctant to follow suit. They’ll all certainly be watching to see how Woodford fares without bonus incentives.
So is this the end of the City bonus? Probably not, because that would require all the banks and fund management firms in the City to end the arms race which, given past behaviour, seems highly unlikely. Still, it’s a step in the right direction.
No last chance for former BHS boss
When Hampshire police pulled over Dominic Chappell for speeding earlier this year, he told them he had been driving since the age of 18 and had never had an accident. And that he used to be a racing driver.
Their response is not known, but yesterday the former head of BHS was banned from driving for six months after racing his green Range Rover through a 40mph zone at almost 64mph.
At the time, 49-year-old Chappell was earning £5,000 a week at BHS, but that was three weeks before the stores chain finally collapsed in late April with the loss of 11,000 jobs.
In court the serial bankrupt argued that he needed to keep his licence to help him in his continued dealings on BHS with the Pensions Regulator and parliamentary enquiries. Chappell said he spent four days a week on BHS business, leaving home at 5.30am and not returning until 9.30pm.
Travelling by public transport would be difficult, he told the court, because of the three boxes of 20,000 BHS documents he has to transport with him. That and the fact that has suffered abuse from passengers when travelling by train.
Despite the large amounts of cash he extracted from BHS during his year in charge of the business, Chappell claimed he could not afford a chauffeur or taxis.
But with 10 points already on his licence for speeding offences clocked up in each of the past three years, magistrate Jenny Gove was not inclined to give Chappell the “one last chance” he asked for.
As the last BHS stores close their doors over the next few days, its 11,000 employees know just how he feels.
Fiona Walsh is business editor of the guardian.com