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Pay-performance sensitivity and firm size: Insights from the mutual fund industry

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  • Cashman, George D.

Abstract

I examine the ex ante decision to make an agent's pay-performance sensitivity an inverse function of organization size. I focus on mutual funds and their decision to use compensation contracts that reduce the advisor's marginal compensation as the fund grows (a declining-rate contract) over the dominant contract type, where marginal compensation is unrelated to fund size (a single-rate contract). I find evidence consistent with the view that declining-rate contracts are a mechanism to keep marginal compensation in line with the advisor's declining marginal product. Specifically, I find that funds with greater exposure to diseconomies of scale are more likely to use a declining-rate contract and to specify a greater amount of compensation decline in their contracts. Consistent with optimal contracting, I find no evidence of a performance difference between funds with declining-rate contracts and funds with single-rate contracts.

Suggested Citation

  • Cashman, George D., 2010. "Pay-performance sensitivity and firm size: Insights from the mutual fund industry," Journal of Corporate Finance, Elsevier, vol. 16(4), pages 400-412, September.
    • Handle: RePEc:eee:corfin:v:16:y:2010:i:4:p:400-412
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    4. Cashman, George D., 2012. "Convenience in the mutual fund industry," Journal of Corporate Finance, Elsevier, vol. 18(5), pages 1326-1336.

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