Are Mutual Fund Managers Paid for Performance? Evidence from U.S. Administrative Earnings Data

58 Pages Posted: 27 Dec 2023 Last revised: 11 Apr 2024

See all articles by John (Jianqiu) Bai

John (Jianqiu) Bai

Northeastern University - D’Amore-McKim School of Business

Linlin Ma

Peking University HSBC Business School

Kevin Mullally

University of Central Florida

Yuehua Tang

University of Florida - Department of Finance

Date Written: October 10, 2023

Abstract

We study the determinants of compensation for portfolio managers in the U.S. mutual fund industry using administrative data on worker-level earnings from the U.S. Census Bureau. We find that the average portfolio manager’s pay is $1.76 million in 2020 dollars and a clear skew toward the right tail of the distribution. More importantly, we document a strong pay-for-performance sensitivity (PPS) for portfolio managers. For instance, a 1% increase in the average abnormal return of the past three, five, and ten years increases an average manager’s pay by 5.3%, 7.8%, and 10.3%, respectively. Furthermore, we also investigate the economic rationale for the performance incentives we document in portfolio manager pay. We find that portfolio managers’ compensation is strongly correlated with the expected fee revenue they generate for investment advisors via the flow-performance relationship. Overall, our paper provides the first quantification of the performance-based incentives for U.S. portfolio managers and offers novel insights into the pay-for-performance paradigm in the U.S. asset management industry.

Keywords: Portfolio manager compensation, pay-for-performance sensitivity, mutual funds, fund managers, flow-performance relationship, agency theory

JEL Classification: G23, J33

Suggested Citation

Bai, John (Jianqiu) and Ma, Linlin and Mullally, Kevin and Tang, Yuehua, Are Mutual Fund Managers Paid for Performance? Evidence from U.S. Administrative Earnings Data (October 10, 2023). Northeastern U. D’Amore-McKim School of Business Research Paper No. 4658990, Available at SSRN: https://ssrn.com/abstract=4658990 or http://dx.doi.org/10.2139/ssrn.4658990

John (Jianqiu) Bai

Northeastern University - D’Amore-McKim School of Business ( email )

360 Huntington Ave.
Boston, MA 02115
United States

Linlin Ma

Peking University HSBC Business School ( email )

Kevin Mullally

University of Central Florida ( email )

412 CBA
Orlando, FL 32827
United States
407-823-2360 (Phone)

Yuehua Tang (Contact Author)

University of Florida - Department of Finance ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

HOME PAGE: http://sites.google.com/site/yuehuatang

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