Somebody had to do it. For years, big bonuses have been paid to those working in the financial services industry without a scintilla of evidence that they work. On the contrary, there have been copious studies showing that the City’s bonus culture is bad for customers, bad for the economy and even bad for the individuals themselves..
So, congratulations to Neil Woodford for having the courage to say that the emperor has no clothes. If the philosophy that has governed the financial services sector for the past few decades is right, Woodford has just committed professional suicide by saying that in future all the staff of his fund management company will be paid a flat salary.
Why? Because the received wisdom is that bonuses are vital in attracting and keeping the elite performers. Even now, Woodford’s high achievers should be polishing up their CVs and looking for new employment.
Woodford is confident he will hold on to his best people, and there is a body of literature to support that view. The Institute of Leadership and Management, for example, interviewed more than 1,000 managers across the economy and found that only 13% put being paid a bonus as one of the three main factors that motivated them. Enjoyment of the role came top (59%), while getting along with colleagues came next (42%).
A joint study by academics at the Universities of Leicester, Sydney, and West Sydney, showed that it made better business sense to reward team performance rather than single people out for individual bonuses. This led not just to better group performance but also got more out of individuals.
The study was inspired by work in the field of biology to assess how to breed better egg-laying hens. The tendency had been to breed from the best layers (the equivalent of the City bankers with the highest bonuses), which led to higher production but also a strain of mean, aggressive birds with short life spans.
Another approach involved breeding from all the hens in the best-laying cages. The chickens were more sociable, had normal life spans and produced higher quality eggs.
The City will now benefit from a controlled experiment to see which works better: the mean bird or the happy hen approach. If Woodford is wrong, his staff and his customers will desert him. He is unlikely to go out of business any time soon.
