Neil Woodford scraps bonus pay at his investment firm

One of the UK's most respected investors has scrapped bonuses at his firm, arguing that they are "largely ineffective" in boosting performance.

The move at Neil Woodford's fund management business runs counter to conventional wisdom in the City that bonuses are needed to motivate staff.

His firm's 35 staff will get a rise in basic pay and benefits as compensation.

Mr Woodford, whose firm has £14bn under management, built a reputation as star stock-picker at Invesco Perpetual.

He set up his own boutique fund in 2014, quickly attracting money from investors hoping that he will replicate years of above-average returns achieved at Invesco.

Craig Newman, chief executive and co-founder of Woodford Investment Management, said in statement: "While bonuses are an established feature of the financial sector, Neil and I wanted to take the opportunity to do something different that supports the firm's culture and ethos of challenging the status quo.

"There is little correlation between bonus and performance and this is backed by widespread academic evidence. Many studies conclude that bonuses don't work as a motivator, as expectation is already built in. Behavioural studies also suggest that bonuses can lead to short-term decision making and wrong behaviours," he said.

The best fund managers can earn millions of pounds in performance-linked bonuses. But following the financial crisis there has been increasing criticism of the links between remuneration and performance.

However, supporters of bonuses argue they are essential to retain good staff who would move on without some other form of compensation.

It is also argued that paying higher salaries increases a firm's fixed costs, making it harder to make cutbacks in the event of a downturn.

To back up the claim that bonuses are ineffective or damaging, the statement from Mr Woodford's firm points to several academic studies, and quotes from an article in the specialist publication The Journal of Corporation Law.

This said: "Financial incentives are often counterproductive as they encourage gaming, fraud and other dysfunctional behaviours that damage the reputation and culture of the organisation.

"They produce the misleading assumption that most people are selfish and self-interested, which in turn erodes trust."