Manning & Napier, an asset manager with $45 billion under management, has devised an unorthodox way of compensating its analysts, penalizing them for selections that cause underperformance in client portfolios and carrying these penalties forward into future years. It says the method more closely links analyst goals with institutional investors, but experts disagree…

“It is very demotivating to carry baggage into the future, particularly as an analyst, as you gave the recommendation but you didn’t buy it,” adds Alan Johnson, managing director of compensation expert Johnson Associates.

However, the analysts are also rewarded for how successfully they pitch these ideas to portfolio managers for inclusion in client strategies, how well the company performs and qualitative measures, such as communication and team work. It is hard to measure not only the investment side but also the benefits of an analyst’s negative recommendations, or how much an analyst saved by not recommending a certain stock, says Johnson. “It’s always imperfect how to measure, although firms try very hard,” he adds.

March 6, 2013