Production Complementarities in Asset Management
65 Pages Posted: 5 Oct 2021 Last revised: 11 Oct 2021
Date Written: October 4, 2021
Incentive provision is expected to be a key driver of asset managers’ compensation, yet empirical evidence on performance-based pay has been limited and mixed. This paper delivers a novel perspective on managerial incentives by examining the role of production complementarities between managers and firms, and quantifying to what extent such complementarities are internalized into compensation. Production complementarities naturally arise in asset management because a firm can influence a manager’s expected productivity by teaming her up with the right skill set and by advertising her performance to investors. Different managers benefit from firm externalities differently, and hence face different trade-offs between their current monetary compensation and firm support. Using a unique registry-based dataset on the production and compensation of Israeli mutual fund managers, we find that managers working with more skilled teammates and receiving more advertising receive lower salary today in return for higher expected productivity. Such effects are stronger for more skilled and less visible managers. The results are consistent with the incentive provision theory for forward-looking agents in the presence of production complementarities.
Keywords: Mutual Funds, Portfolio Managers, Compensation
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