Fund manager compensation and the impact on fund performance

Abstract

Fund managers earn large bonuses while the value added by them seems doubtful, particularly in light of the low persistence of superior fund performance. Thus, the amount of bonuses and their design is questionable. The aim of this thesis is to determine how fund manager compensation impacts fund performance.

The empirical part of this thesis uses a hand-collected data set of compensation structures of fund managers from U.S. domestic equity funds as well as return and benchmark data from several data providers. Fund performance is measured using four different performance measures each net- and gross-of-fees.

The results show that compensation linked to the fund performance relative to a benchmark significantly increases fund performance. Other compensation forms like long-term incentive plans, compensation linked to firm profitability or other benefits do not significantly impact fund performance and may even have a negative effect on performance i.e. in the case of qualitative compensation elements. Although the results of this thesis are limited and not robust in all cases, the incentive effect of performance-based compensation gives a clear indication of the importance of incentives for managers.