Portfolio Manager Compensation in the U.S. Mutual Fund Industry
92 Pages Posted: 18 Mar 2012 Last revised: 15 Nov 2018
Date Written: February 21, 2018
We study compensation contracts of individual portfolio managers using hand-collected data of over 4,500 U.S. mutual funds. Variations in the compensation structures are broadly consistent with an optimal contracting equilibrium. The likelihood of explicit performance-based incentives is positively correlated with the intensity of agency conflicts, as proxied by the advisor’s clientele dispersion, its affiliations in the financial industry, and its ownership structure. Investor sophistication and the threat of dismissal in outsourced funds serve as substitutes for explicit performance-based incentives. Finally, we find little evidence of differences in future performance associated with any particular compensation arrangement.
Keywords: portfolio manager compensation, mutual funds, optimal contracting, agency conflicts
JEL Classification: G23, J33
Suggested Citation: Suggested Citation