(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)
By Robert Cole
LONDON, April 4 (Reuters Breakingviews) - Fund managers make
too much money. Or so Sven Giegold, a German member of the
European parliament, seems to think. He is pushing proposals in
Brussels that would impose bonus caps on asset managers’ pay.
Borrowing from strictures about to be inflicted on EU bankers,
the Giegold initiative would stop fund managers receiving annual
bonuses worth more than 100 percent of base salary.
If good sense prevails, Giegold’s initiative will be
rejected. Legislators should avoid interfering in the affairs of
private enterprises - unless there are over-riding extenuating
circumstances. There are for bankers: systemic risks and
implicit government guarantees. Asset managers pose no palpable
systemic financial risks; nor do they enjoy taxpayer guarantees.
They, and their customers, should be left to mind their own
That said, there is some economic merit in the Gielgold
ideas. For one thing, it has a rough justice. If fund managers
press for moderation in pay at the companies they invest in,
they should practice what they preach.
Bonus caps might also serve to align more closely the
interests of fund managers and the actual investors. These
clients do not, or should not, care only about investment
performance. Managers’ pay should reflect fund managers’ ability
to manage regulation, match liabilities, and control risk. Since
many of the skills are fixed irrespective of investment market
conditions, it follows that more of the pay should be fixed.
There is a place for bonuses in fund management. Impressive
performance should bring rewards. But that consideration could
be captured within a bonus of up to 100 percent of salary –
especially if base salaries move high to reflect job-market
competition for skills. Would a bonus cap make fund management
firms’ payroll costs less flexible? Probably. But that could
bring individual fund managers a salary security that promotes
intelligent and patient decision making. Bad fund managers,
meanwhile, should be replaced, not allowed to trundle along on
low base salaries.
Remuneration incentives should foster asset allocation
behaviour consistent with clients’ long term interests.
Legislation is unnecessary and unwise, but self-imposed bonus
caps might help.
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- Bonuses for fund managers could be capped at 100 percent
of salary, under draft rules being considered by the European
Parliament. The stricture would most likely apply to those
responsible for so-called UCITS funds.
- "This crucial provision will help strengthen investor
protection and reduce risky speculation," said Sven Giegold, the
German MEP most closely associated with the proposal. "It will
also complement the recently adopted EU rules capping bankers’
bonuses, ensuring these rules cannot be circumvented and
providing for a level playing field," he said.
- Sven Giegold web site: link.reuters.com/qud27t
- For previous columns by the author, Reuters customers can
click on [COLE/]
(Editing by Edward Hadas and David Evans)
Keywords: BREAKINGVIEWS BONUS/FUND
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