Getting the Compensation Structure Right in the Mutual Fund Industry

 

Keith C. Brown

Laura T. Starks

 

Strategy & Business 7, 1997, pp. 16-18

 

 

Abstract

                       

Despite the rapid increase in institutionally managed assets over the past several decades, investors remain remarkably unaware of how professional asset management companies are organized or the incentives provided to the men and women who manage that money.  In this paper we summarize recent research investigating the investment decisions that mutual fund managers make in response to the generally accepted method of compensation in the industry.  We conclude that the mutual fund ‘tournament’ structure currently in place does indeed provide adverse incentives to portfolio managers that can lead them to alter fund objectives from a long-term to a short-term focus.

  

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