A Better Alternative to Capping Fund Manager Bonuses

Capping manager bonuses obscures the real issue, says Morningstar's Chris Traulsen as he proposes a better solution to incentivise managers to perform for investors

Christopher J. Traulsen, CFA 8 April, 2013 | 1:36PM
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Much ado has been made recently over the issue of bonus caps for fund managers. This discussion stems directly from a proposal from Sven Giegold, German MEP and UCITS V rapporteur, to cap fund managers’ bonuses at 1x their fixed pay.

According to the Financial Times, Giegold has since indicated a willingness to loosen the proposed cap to allow for bonuses up to 2x fixed pay. However, the cap is by its nature arbitrary and does nothing by itself to address the core issues: (1) the need for manager incentives to align the interests of fund managers with those of fund investors and (2) the need for sufficient information to be available about incentives for investors to make informed decisions. 

In this respect, the larger UCITS V proposal that Giegold is shepherding through the European Parliament has far more laudable components than the headline-grabbing bonus-cap. In particular, it would require that:

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About Author

Christopher J. Traulsen, CFA  is director of fund research, Europe and Asia, Morningstar.