Fund manager pay pumped by past glories

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If the markets tank over the next few months, fund managers - like everyone else - will be looking at reduced bonuses this year, right? Wrong.

Asset management firms are increasingly allocating bonuses based on performance over three years, rather than just the one. This means that, even if this year proves to be a stinker, come bonus time some senior fund managers will be laughing on the back of sterling performances in 2005 and 2006.

"More houses have been introducing them, but they are still not the norm and are mostly at senior levels, normally lead or senior portfolio managers," points out Iraj Ispahani at recruiter Korn/Ferry International.

The thinking behind this - that fund management generally has a longer-term outlook and so should be rewarded in the same way - is reasonable enough, argues Kim Yates, director of Asset Management Principal Search: "Fund managers, at least long-only managers, may sometimes be wrong for the right reasons. They can bomb over one year but then come significantly right over the next two," she says.

"If you have a good track record that attracts investors but have a bad year, no one is going to write you off as a bad fund manager. It happens," she adds.

But if the market takes a substantial longer-term dive, fund managers won't be kept warm forever, warns Ispahani: "The performance is captured over a three-year period but, while you will be able to offset a bad year against good ones, it will eventually catch up with you," he says.

"The difficulty is they are not really sustainable. If you have a year where the bottom falls out of the market, then you are going to have a client attention issue," he adds.

We suspect this means clients won't be too happy if they find out fund managers are still being paid handsomely while their investment is shrinking.