Evidence on the Compensation of Portfolio Managers∗

We survey 396 portfolio managers about the structure of their compensation. Overall, compensation packages are more likely to be “subjective and discretionary” than “objective and formula-based.” Firm success-factors such as firm profitability have more impact on bonuses than client success factors like investment performance. Differences in the structure of compensation across firms, clients, job-types, and manager characteristics reflect likely differences in the underlying contracting environments, especially differences in the difficulty of monitoring performance and exerting control. ∗We thank John Biggs for connecting us with investment industry professionals well-versed in the challenges of compensating portfolio managers. We appreciate our conversations with William Shanahan, Vice President of Compensation at TIAA-CREF and with representatives of two compensation consulting firms Adam Barnett, Managing Director at McLagan Partners and Kathryn Steele and Steve Unzicker with Capital Resource Advisors on best practices in the industry. We received expert advice on the survey instrument from Diane DelGuercio, Daniel Bergstresser, Anna Pavlova, Bing Liang, and John Nagorniak. We thank the portfolio managers at Commerce Bank, A.G. Edwards, NISA Investment Advisors, and Bank of America for taking the survey and reporting their experience with it to us. We gratefully acknowledge all 396 portfolio managers who took the time to fill out the survey and the financial support of the Center for Research in Economics and Strategy at Washington University. All the errors are our own. †Corresponding author. Olin School of Business at Washington University. One Brookings Drive, Campus Box 1133, St. Louis, MO 63130. Phone: 314-935-6349.