Portfolio Manager Compensation and Mutual Fund Performance
We use a novel dataset to study the relation between individual portfolio manager compensation and mutual fund performance. Managers with explicit performance based pay exhibit superior subsequent fund performance, especially when investment advisors link pay to performance over a longer time period. In contrast, alternative compensation arrangements, such as fixed salary, assets based pay, or advisor profits based pay are not associated with superior performance. Our tests further show that the positive relation between performance based contracts and fund performance is not driven by the selection of talented managers proxied by education background. Lastly, managers with performance based pay engage less in risk shifting activities. JEL Classification: G23, J33