Should Managers Be Penalised for Poor Performance?

REKENTHALER REPORT: Fund managers seem to pass the new Taleb test for having skin in the game, says Morningstar's John Rekenthaler

John Rekenthaler 21 August, 2013 | 7:00AM
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Nassim Taleb has a new hobbyhorse. Best known for publishing a book (The Black Swan) on the randomness of financial markets one year before the 2008 market crash (good timing that), Taleb is now tackling the subject of manager compensation. Taleb argues that manager compensation must be truly two-way, so that in addition to rewards for success, managers should face "damage" for failure.

The argument is very broad, involving managers of all types—investment, corporate and political. (For hedge fund chiefs, intellectual ambitions tend to expand along with net worth.) For this column, we need only concern ourselves with fund managers. Should they face damage for failure? If so, do they?

I can't help with the first question. Along with two pages of equations, Taleb's most recent paper cites Kant, Hegel, Ayn Rand, Isocrates and the 18th century theologian Bishop Butler. Critiquing the argument is past my pay grade. I can, however, address the second question. Say that Taleb has it right, and that fund managers must have skin in the game, to use his phrase. Do they? My answer: Yes. Absolutely.

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John Rekenthaler

John Rekenthaler  John Rekenthaler is vice president of research for Morningstar.

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