Fund Manager Bonuses Are Not Tied To Portfolio Performance

March 17, 2004 ( - A big chuck of a money manager's total compensation is found in their annual bonuses, a figure that is surprisingly detached from the pluses and minuses of a fund's performance.

Nearly 400 money managers – an aggregate that includes portfolio managers at mutual-fund firms and other registered investment advisers – said the bonuses they are paid account for more than 45% of their total compensation.   Citing the as-of-yet unpublished “Evidence on the Compensation of Portfolio Managers” study conducted by Heber Farnsworth and Jonathan Taylor, assistant professors of finance at Washington University in St. Louis, the Wall Street Journal surprisingly reports most portfolio managers are say their firms’ sales and profits are often greater drivers of their bonuses than the investment returns they earn for clients.   This perhaps comes a surprise for those who thought portfolio heads were given proper incentive for striving for higher returns.  

“They’ve separated bonuses from how well you perform for clients,” Farnsworth told the Journal. “Instead, most are paid based on firm profitability. It sounds trite, but there’s something a little surprising in that.”

Portfolio managers were asked to rank the largest determinants of their bonus. The largest measure of bonus payout, cited by 44% of the sample, was “profitability or stock-price performance.”   This was followed by the metric that groups together profitability, new money flows into a manager’s portfolios and “new business” – selected by 37% of respondents – and the quarter of the sample that indicated their bonuses were largely influenced by current investment returns versus a benchmark, current returns versus a peer group or past years’ investment returns.   At the bottom of the scale was tax-efficiency and risk-control in managing client assets.

Interestingly, the Journal found there was not muchdifference in performance between those managers whose bonuses were most heavily driven by firm-based metrics rather than investment returns.

The study becomes very topical when held up against the light of pending regulatory action.   Last week, the US Securities and Exchange Commission (SEC) p roposed new regulations that would force fund families to disclose the identities of members of portfolio management teams as well as their compensation and whether they own shares in the funds they manage (See   SEC Proposes Fund Manager Disclosures).   The proposal is meant to unearth more about portfolio managers including their incentives and potential conflicts of interest when they manage multiple fund portfolios.