Funds run low on funds (for pay, that is)

Traditional fund managers are becoming financially challenged as they try to compete with hedge funds on pay.

PRPi, a human resources consultancy for the fund management industry, predicts that fund managers' compensation costs as a proportion of revenues are set to rise from just over 50% today to 65% by 2010, reports the Financial Times.

A survey by the consultancy revealed that nearly 75% of fund management houses now share revenues with their investment professionals, up from 29% three years ago.

The FT quotes Richard Parkhouse, founder of PRPi, as saying the industry has become all about performance: "This is great for the investor but companies need to think about how it will work for them."

Various solutions are on offer. Fund managers are apparently trying to get around the cash-flow problem by issuing phantom, or synthetic shares. Edinburgh-based asset manager Baillie Gifford is said to tie pay closely to the profitability of the whole company, thereby encouraging teamwork. And staff at MFS, part of Deutsche Bank, reportedly earn a third of their bonus at the discretion of their colleagues.