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Fund managers earning $1.1m on average are not being paid for performance

What determines the compensation of the average fund manager? A new study* by academics at Wharton, MIT and Texas A&M universities, says it's not performance. It's assets under management. 

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Using information from CRSP and Morningstar, the academics assembled a data set covering pay for 450 fund managers across America (but not in New York). They found that the median US fund manager earns $462k, but that the mean average US fund manager earns $1.1m. 

By implication, therefore, there are large disparities between pay for superstar fund managers and pay for fund managers at the bottom of the pile. 

While the academics found that the 95th percentile of fund managers were receiving salaries averaging $1.3m and bonuses averaging $3.3m, leading to total compensation of $4.6m, the researchers found that fund managers in the fifth percentile only had $40k salaries and $9k bonuses. 

 

 Why is that some fund managers earn $4.6m and others earn $49k? The usual argument is performance: fund managers who generate big profits for investors will receive a proportion of those profits in their bonuses. 

However, the academics found that this wasn't necessarily the case: instead of being related to performance, they found that high pay was most significantly related to assets under management (AUM) and to changes in AUM.

When a fund manager worked for a fund with significant inflows, the researchers found that he/she was likely to receive a boost in income that was unrelated to his/her performance. They also found that fund managers switching jobs out of a fund that had recently benefited from inflows, were more likely to negotiate a "significant income promotion."

In contrast, funds that had experienced outflows were more likely to pay badly, and people leaving funds suffering from outflows were less likely to find high paying roles elsewhere. 

"Large outflows over a few years significantly increase the risk of job turnovers that come with a substantial cut in compensation (i.e., job turnovers with demotions), while large inflows and significant positive returns over a few years elevate the likelihood of job turnovers accompanied by a substantial increase in compensation (i.e., job turnovers with promotions)," noted the researchers. 

The implication for fund managers everywhere (including New York) is that once investors start pulling money from the fund you work for, your own performance is likely to have little impact on your ability to negotiate high pay in a subsequent role. Leave sooner rather than later. Portfolio managers at Segantii, take note. 

*Fund Flows and Income Risk of Fund Managers*

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AUTHORSarah Butcher Global Editor

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