Fee structure and equity fund manager’s ability screening

This paper develops a simple compensation model that screens fund managers’ ability ex ante by designing the management fee rate and performance-based incentive ratio, rather than constructing performance indicators. This method avoids common drawbacks of indicator-based approaches, such as missing data, measurement error, and survivorship bias. The model is grounded in the Spence–Mirrlees condition. Results show that a scheme with a low management fee and high performance incentive allows high-ability managers to earn expected income above their reservation level, while low-ability managers earn less. In this context, fund managers’ indifference curves satisfy the Spence–Mirrlees condition, enabling effective screening of high-ability candidates.