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 business.
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.