Fund Bonuses Likely to Be Lower This Year

Fund bonuses will, undoubtedly, be far lower this year, and with that, a number of managers could look to jump ship, Investment News reports.

Putnam Investments’ recently announced a new compensation program whereby managers will receive their full bonus only if their fund is in the top quartile over the past three years. If a manager does better, they will get even more money on top of their bonus target. If they hit the mid-range, however, they will only get 50% of their bonus. Anyone in the bottom quartile gets nothing.

“As a firm, Putnam is going to have a pay-for-performance compensation philosophy,” explained Putnam President and CEO Robert Reynolds. “Advisers are looking for us to be in the top quartile of performance. We want everyone who comes to work here to know that the total focus is on delivering superior performance over time.”

Laura Lutton, associate director of mutual fund analysis at Morningstar, believes such strict specifications could result in little to no compensation for a number of fund managers, particularly in light of the weak performance last year and steep declines this year. “Some managers may have really blown their five-year record,” Lutton said. “So what do they do now, just quit? Are firms going to make adjustments to their pay plans? It will take a while for managers to turn around that record.”

But with bonuses comprising as much as 80% of some portfolio managers’ total compensation, firms that take a hard line against poorly performing managers “risk losing those people or [having to] fire them,” said Roy Weitz, publisher of FundAlarm.com.

Thus, while Putnam is taking a hard stance toward its managers, others are extending the benchmark to five-year returns. Those firms including BlackRock, Franklin Resources, Janus Capital Group, Legg Mason, MFS Management and T. Rowe Price.