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Compensation Design and Career Concerns of Fund Manager

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Author Info
Ching-mann Huang ()
Len-kuo Hu
Hsin-Hong Kang
Abstract

We develop an optimal incentive contract for the fund manager with career concerns. Drawing upon the framework of Gibbons and Murphy (1992), we restructure the performance of fund manager with emphasis on the multiplicative effect of previous effort on the latter period, and derive the positive cross-period linkage of fund manager’s efforts. In particular, our study derives that a greater first-period’s effort by the fund manager will induce more second-period effort and greater compensation in either fixed or variable (performance-related) portion of the payment. Though the total performance related pay might increase as the result of greater effort in the previous period, we show that the pay-performance sensitivity in the second period will decline. Moreover, the initial wealth increase will motivate the fund manager to exert more effort and induce better performance, but decrease the pay-performance sensitivity in the second period. Copyright Springer Science + Business Media, Inc. 2005

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File URL: http://hdl.handle.net/10.1007/s11156-005-7019-5
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Publisher Info
Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

Volume (Year): 24 (2005)
Issue (Month): 4 (June)
Pages: 379-397
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Handle: RePEc:kap:rqfnac:v:24:y:2005:i:4:p:379-397

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Web page: http://springerlink.metapress.com/link.asp?id=102990

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Related research
Keywords: compensation design; fund management; career concerns; pay-performance sensitivity;

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  3. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January. [Downloadable!] (restricted)
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  8. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
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  15. Prendergast, Canice & Stole, Lars, 1996. "Impetuous Youngsters and Jaded Old-Timers: Acquiring a Reputation for Learning," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1105-34, December. [Downloadable!] (restricted)
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