According to Bloomberg, which quoted the parliament’s lead lawmaker, Sven Giegold, legislators are weighing changes to draft measures approved by the assembly’s economic and monetary affairs committee earlier this year that would ban managers of Ucits funds from receiving bonuses worth more than their fixed pay.
How much do top fund managers deserve to be paid? I guess it’s similar to arguments about remunerating the star player of your favourite Premiership football club – if they consistently perform well, they should be rewarded handsomely, right?
What is clear is that managers’ pay should be aligned to the long-term interests of their clients and that bonuses should not be paid for just replicating index performance, and certainly not to those who fail to beat their benchmark.
Detailed measures
In its response to the European Parliament, the IMA outlined a number of detailed measures, the most significant being, firstly, that bonuses should be assessed over multi-year periods with fund managers not being judged on just one single 12-month period.
Secondly, it says bonuses should be deferred over several years, making clawback easier if things go badly wrong subsequently.
Thirdly, and perhaps most interesting from a fund picker point of view, the IMA says fund managers should be required to disclose their remuneration and explain why they believe their pay structure is aligned to long-term client outcomes.
IMA chief executive Daniel Godfrey stresses that without these measures the current proposals would weaken alignment.
“If these rules are introduced, even if salaries do not increase as a result, the proportion of total pay that a fund manager gets for turning up every day will increase and the proportion of total pay that they get for adding value will reduce,” he says.
Transparency first
“Furthermore, the argument that this is necessary to curb risk taking is not sound because Ucits funds, by definition, control risk in a transparent way with boundaries set by the rules and the prospects of each fund.”
As with any legislation, especially one which spans a whole continent, common sense goes a long way. Even if the draft measures are approved in their current form, it will be interesting to see if the IMA’s ideas still carry weight and could be adopted voluntarily in what is, after all, the most sophisticated retail fund market in Europe.
