Evidence on the Compensation of Portfolio Managers

Abstract

We surveyed 396 portfolio managers about the structure of their compensation. Overall, more compensation packages are subjective/discretionary than objective/formula based. Firm success factors such as firm profitability have more effect on bonuses than do client success factors such as investment performance. Differences in the structure of compensation across firms, clients, job types, and manager characteristics reflect likely differences in the underlying contracting environments, especially differences in the difficulty of monitoring performance and exerting control. 2006 The Southern Finance Association and the Southwestern Finance Association.

Bonus Payments and Fund Managers' Behavior: Transatlantic Evidence

“…Moreover, larger investment firms typically employ more asset managers, a fact being reflected in the data set (see Table 1). Finally, the demographic characteristics of fund managers in our sample are almost identical to those in different survey studies for the US (Farnsworth and Taylor, 2006) and Germany (Arnswald, 2001, Menkhoff et al, 2006, indicating that our data are not distorted by a selection bias. 11 Table 2 presents the typical personal characteristics of the surveyed asset managers clustered by country.…”

“…This relation is strongly driven by fund mangers in higher positions who receive higher bonuses and where bonus depends on company success. 14 The influence of fund performance is comparatively weaker, however (see also Farnsworth and Taylor, 2006). This may reveal a truly widespread and self-evident importance of relative fund performance, just as shown by its high overall importance (see column 1).…”

“…So, the intuitively appealing position-argument holds in a multivariate context too and appears to be stronger than possible influences from age, experience or other variables. The second "world-wide" determinant, firm size, means that bigger companies pay higher bonuses (see also Farnsworth and Taylor, 2006, for the US). This may indicate that larger firms rely more on bonus payments as an incentive mechanism.…”

“…and also rely on some of our data although with a different focus. Earlier work on the US includes Shiller and Pound (1989) or Farnsworth and Taylor (2006), work on Germany includes Arnswald (2001), Menkhoff et al (2006) or Drachter et al (2007).…”

Employment risk, compensation incentives, and managerial risk taking: Evidence from the mutual fund industry

“…The impact of explicit incentive contracts on risk taking charges a fixed percentage management fee on its assets under management, the fund family profits from funds that reach a top position by the end of the year and eventually attract new inflows. However, the fund manager also benefits from reaching a top position by the end of the year since a fund manager's compensation typically depends on past performance as well as on the size of the fund managed by her (see, e.g., Khorana, 1996;Farnsworth and Taylor, 2006). As fund size is mechanically linked to inflows, there is also a convex relationship between the fund's past performance and the compensation of the fund's manager.…”