UK investor Neil Woodford scraps bonuses as it leads to ‘wrong behaviours’

Colin Kruger, CBD:

One of Britain’s most respected investors, Neil Woodford, has scrapped staff bonuses at his investment group, saying it has proved to be “largely ineffective” which can lead to “wrong behaviours” by staff.

“There is little correlation between bonus and performance, and this is backed by widespread academic evidence,” said the firm’s chief executive Craig Newman.

The academic evidence directly cited by the group was even more damning. “Financial incentives are often counterproductive as they encourage gaming, fraud and other dysfunctional behaviours that damage the reputation and culture of the organisation,” said an extract from The Journal of Corporation Law. “They produce the misleading assumption that most people are selfish and self-interested, which in turn erodes trust.”

I hope we see more of this. Large corporations need to wake up to the fact that bonuses are counter-productive. Not only do they encourage “wrong behaviors” among company executives, they also destroy trust within the organization and with shareholders and the public. Share options are simply a variation on the same theme.

Rather encourage staff to become shareholders, with low-interest loans linked to a clause that prevents sale of the shares for a minimum of 5 to 10 years. That gives employees some skin in the game and aligns their interests with shareholders.

Source: UK investor Neil Woodford scraps bonuses as it leads to ‘wrong behaviours’