Attention, CEOs. The next time portfolio managers grill you about lavish compensation unrelated to your job performance, ask about their own pay packages. Many big asset management firms now dole out sizable guaranteed long-term bonuses that are not tied to portfolio managers’ results, finds a study by economist Amin Rajan.
“Fund companies will remain locked into outrageous compensation contracts until investors and their advisers focus on the long term, where system and discipline are more important than individual managers,” says Rajan, who runs the U.K.'s respected Centre for Research in Employment and Technology in Europe.
Rajan, 58, says he interviewed 300 institutional investors (including 70 CEOs and CIOs) that collectively oversee E25 trillion ($30.4 trillion) in Europe, Asia and North America. Half the firms guarantee annual bonuses to important portfolio managers. The average bonus: E6.6 million.
Rajan’s 56-page report delves into firms’ efforts to shift more of their costs from a fixed to a variable basis to cope with lower fees. But, Rajan says, “one of the biggest barriers to a more flexible cost base are bonuses paid regardless of performance and which are guaranteed for five to ten years.”
Nonetheless, the former senior economist for the British government (he devised the econometric forecasting model for Margaret Thatcher’s Exchequer) notes that “because pension fund consultants advise their clients to invest with particular managers, fund companies are frequently at the mercy of employees who demand these bonuses to stay.”
