Odey Asset Management recently lost a dispute with HM Revenue & Customs that could have changed how other firms and companies pay executives for performance. The dispute dates back to the financial crisis, when the firm began to take on more people to create new funds and expand its existing ones, selling mainly to institutions. Since then, Odey funds have become more generally available through platforms such as Hargreaves Lansdown.
The firm told the tribunal that, until 2010, it had paid bonuses based on the profits generated in the previous year to its fund managers and traders in cash and in an ad-hoc way. As a result, the managers’ focus always tended to be on their current-year performance rather than the long-term success of the business. In a good year, the best performers might well receive over £1m, and there was little to stop them from then leaving. Odey’s executives realised that fund managers needed to invest some of their pay in their own funds because, according to the firm, it would create “a different dynamic” for them “when deciding whether the risk of an investment could be justified”. And having skin-in-the-game would help to encourage potential clients to invest in their fund.
But Odey is not a company so how could this be set up? Since 2002, it’s been a limited liability partnership, so there are no shares or shareholders. The partners own the firm and share a collective responsibility for what it does, but they have no individual responsibility for the actions of other partners. And, as with a shareholder in a limited company, they can’t lose more than they invest. When it comes to tax, distributions to the partners are taxed as if each individual is self-employed.