New Star Asset Management, John Duffield's beleaguered fund management group, is having to issue 35 million new shares, equivalent to 15 per cent of the existing equity, to finance the next bonus scheme and keep his top managers happy.

New Star's funds have seriously underperformed recently. Its own share price has fallen by 72% in the last 12 months to today's 133.75p.

But Mr Duffield, chairman of the firm, today said it was vital the firm held on to key staff at a time when the volatility in the world's financial markets creates more opportunities for people to move to firms that might look more attractive.

"We believe it is important to ensure the interests of key employees are closely aligned with those of all shareholders, and to make sure those shareholders are locked in," he said.

Mr Duffield and Howard Covington, the chief executive, will not personally benefit from the bonus scheme as they consider their existing holdings in the company enough incentive. Mr Duffield holds some 17.7 million shares or 7.6 per cent of the company.

Of the 35 million new shares, 3.5 million will be awarded to five of New Star's executive directors. They will be held in an employee benefit trust and handed to managers if they meet performance targets.

The scheme is needed since the current incentive scheme, set up at the time of New Star's flotation, and also based on shares, was due to expire in August 2009.

Floated in November 2005 at around 240p, New Star's share price has collapsed by two thirds from a peak of 420p on two successive warnings over a run of customer defections as retail investors worry about declining property values. Speculation about the size of the new share issue required to keep managers on board had also been weighing on New Star's share price.

New Star said it had discussed the new plan with major shareholders and holders of 31.3 per cent have indicated their support. This morning the shares rose 2.25p at 136p.

Mr Duffield said the new plan would incentivise managers until at least the end of 2012. The annual cash cost of the scheme will be between £5 million and £10 million.

Fund managers will be set targets to achieve their full share award while other executives will be rewarded according to operating profits.

Operating profits will have hit £70 million before any payout is made and a target of £120 million for the top reward. Operating profits were £98 million last year, but are expected to halve this year.

There will also be a £5 million-£10 million cash bonus scheme, aimed largely at staff not in the share bonus pool.

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