Fund Firm Alters Manager Compensation

American Century Investments will restructure its bonus system for portfolio managers. The move will reward the firm's best performers with stock options and tie incentives to long-term performance.

The newsletter Fund Action reports the firm is adding a five-year performance component and will measure performance based on a benchmark rather than a peer group, as it currently does.

The plan represents one method in which the mutual fund manager is exploring ways to better reward employees and increase ownership in the company, says American Century's Chris Doyle. The firm believes making stock options more readily available to managers will improve on its ability to attract and retain top people. Doyle says data show that "outperforming benchmarks is highly correlated with strong performance versus peers."

Currently, American Century's portfolio managers receive an annual cash bonus based on performance over a one- and three-year period. The new plan, which will be implemented over the next few years, will include a five-year performance measurement in the determination of bonuses.

American Century isn't the only mutual fund firm that has altered its bonus system. Others, such as T. Rowe Price, have adopted long-term performance incentives, in large part because they better reflect shareholder objectives. They also mark a departure from the common practice of rewarding returns measured over relatively short periods, which is decried by fund rating services such as Morningstar.