Money envelope

'Meet your targets and you'll get a bonus' is gone, 'We'll give you a pay rise and you'll meet your targets' is in. For one of the City's most revered investors, at least.

Neil Woodford has scrapped bonuses for the 35 staff at his fund management firm, Woodford Investment Management. He argues that they are "largely ineffective" in improving performance of individual employees.

Instead, he will be giving his workforce a pay rise and will add company benefits.

But there is a shift, in the wider business world at least, away from the method of dangling a bonus in front of an employee in the hope he does what it required to get it. And this is the first real sign of that shift moving into the City.

Craig Newman, chief executive and co-founder of Woodford Investment Management, said in statement: "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.

"There is little correlation between bonus and performance and this is backed by widespread academic evidence. Many studies conclude that bonuses don't work as a motivator, as expectation is already built in. Behavioural studies also suggest that bonuses can lead to short-term decision making and wrong behaviours."

Quoting an article from the The Journal of Corporation Law, Woodford said: "Financial incentives are often counterproductive as they encourage gaming, fraud and other dysfunctional behaviours that damage the reputation and culture of the organisation.

"They produce the misleading assumption that most people are selfish and self-interested, which in turn erodes trust."