Top UK investment firm scraps bonuses, says can lead to ‘wrong behaviors’

Star investor Neil Woodford to scrap performance bonuses

One of the U.K.'s best-known fund managers has scrapped bonuses at his investment management firm, saying there is little correlation between bonuses and performance.

Woodford Investment Management, founded by star stock-picker Neil Woodford, said Monday that it had ceased paying discretionary bonuses in April.

"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," CEO Craig Newman said in a statement.

"We have implemented a remuneration scheme that is fair and appropriate for Woodford employees and, ultimately, clients. Drawing on our experience of various bonus-led remuneration models, we concluded that bonuses are largely ineffective in influencing the right behaviors," he added.

Daniel Grill

The new policy applies to all permanent staff at Woodford, including fund managers and sales people. Staff now receive a single salary and benefits including pensions, private medical care and life insurance.

The move is an unusual one in a sector where bonuses are viewed as crucial to performance and preventing talented fund managers from moving elsewhere.

However, Newman said bonuses could lead to "short-term decision-making and wrong behaviors," echoing concerns issued by regulators since the global financial crisis of 2007/08.

Fund management firms often aim to beat index benchmarks, but Woodford describes itself as "benchmark agnostic." It was founded in May 2014 and now has more than £14 billion ($18 billion) of assets under management.

Ben Lofthouse, co-manager of the global equity income fund at Henderson Global Investors, said the advantage of paying bonuses was employees could benefit when businesses performed well, but businesses could cut costs by not paying bonuses in hard times.

"I don't know about the behavior question, that is quite a thorny one. But, in theory, it should be healthier for businesses if people have the right incentives and there is a bit of operational give," Lofthouse told CNBC's Squawk Box Europe.

Follow CNBC International on Twitter and Facebook.