Pay for Performance: Compensation Growth Dynamics in Private Equity

72 Pages Posted: 7 Feb 2022 Last revised: 16 Nov 2023

See all articles by Wayne Lim

Wayne Lim

Harvard University; University of Oxford

Date Written: Nov 11, 2023


In active asset management, compensation contracts offer fund managers direct performance incentives. However, managers also have indirect performance incentives – the prospect of higher future income though fund inflows, higher fees, or by initiating new business lines. I develop a rational learning model to estimate the elasticity and magnitude of these indirect incentives in relation to performance. For buyout firms, performance is associated with larger increases in follow-on fund sizes but not with fund economics or their ability to open new fund businesses. For VC firms, performance is more likely to impact future compensation terms and their likelihood of initiating new business lines. The empirical results indicate that the ratio of indirect incentives to direct performance incentives is higher for buyout (1.2) than VC (0.6) and declines with fund sequence number while performance fees remain contemporaneously unchanged. Nonetheless, I find no evidence supporting concerns of inefficient contracting, suggesting that existing performance fee structures align with investors’ long-term welfare.

Keywords: private equity, buyout, venture capital, compensation, performance

JEL Classification: G1, G2, G3, G17, G23, G24, G34, J33, G32, G35

Suggested Citation

Lim, Wayne, Pay for Performance: Compensation Growth Dynamics in Private Equity (Nov 11, 2023). Available at SSRN: or

Wayne Lim (Contact Author)

Harvard University ( email )

University of Oxford ( email )

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