Markets

Fmr. AllianceBernstein CEO has a message for managers at his new firm: Perform, or take a pay cut

Key Points
  • Former AllianceBernstein CEO Peter Kraus is paying employees at his new venture based on how they perform against the broader market.
  • His new firm Aperture Investors will only charge higher fees than exchange-traded funds when they beat the market, and will claw back the bonuses for managers if they don't, according to a Wall Street Journal report.
  • By aligning corporate pay with performance goals, Kraus is doubling down on odds that his money managers will outperform from the get-go. 
Peter Kraus 
Amber De Vos | Patrick McMullan | Getty Images

Former AllianceBernstein CEO Peter Kraus is using an unorthodox way to beat index funds.

His new venture, Aperture Investors, is paying fund managers based on how they perform against the broader market, and will only charge higher fees than exchange-traded funds when they beat the market, according to a Wall Street Journal report.

"What's different," Kraus told the Journal, "is that we as a firm are paid only on performance."

Actively managed funds often base client fees, which are typically around 2 percent, on the fund's performance. Many pension funds and endowments have been willing to ramp up those fees in recent years for managers who consistently outperform.

Aperture employees though will have parts of their bonuses clawed back if they don't. The firm uses five years of performance to calculate long-term pay, which gives managers time and a chance to build a track record, Kraus told the Journal. But by aligning corporate pay with performance goals, Kraus is doubling down on odds that his fund managers will outperform from beginning.

The rise of passive investing has put pressure on stock-picking firms like AllianceBernstein. Kraus left the firm in 2017 after a decade, and was reportedly fired by the company's parent company French insurer AXA SA after a clash over management style and succession plans.

— Read the entire Wall Street Journal report here.