4 September 2010

Dangers of Performance Pay

News that a highly risky mortgage bond has found ready buyers illustrates the danger of paying financial advisers or money managers a performance bonus. This type of compensation encourages fund managers to take undue risks. As it is not their own money that is at stake they find it that much easier to take risky investment decisions. Should things turn out well they are in line to earn a performance bonus. On the other hand, should the investment under perform or even turn sour they have still been paid their regular salary for the duration. With a bit of luck and the gift of the gab they may well find an excuse for the poor result by pointing to difficult markets. At worst they are losing the mandate or their job.