Getting the Compensation Structure Right in
the Mutual Fund Industry
Keith C. Brown
Laura T. Starks
Strategy & Business 7, 1997, pp. 16-18
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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