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Compensation Design and Career Concerns of Fund Manager

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  • Ching-mann Huang
  • Len-kuo Hu
  • Hsin-Hong Kang

Abstract

We develop an optimal incentive contract for the fund manager with career concerns. Drawing upon the framework of Gibbons and Murphy (1992), we restructure the performance of fund manager with emphasis on the multiplicative effect of previous effort on the latter period, and derive the positive cross-period linkage of fund manager’s efforts. In particular, our study derives that a greater first-period’s effort by the fund manager will induce more second-period effort and greater compensation in either fixed or variable (performance-related) portion of the payment. Though the total performance related pay might increase as the result of greater effort in the previous period, we show that the pay-performance sensitivity in the second period will decline. Moreover, the initial wealth increase will motivate the fund manager to exert more effort and induce better performance, but decrease the pay-performance sensitivity in the second period. Copyright Springer Science + Business Media, Inc. 2005

Suggested Citation

  • Ching-mann Huang & Len-kuo Hu & Hsin-Hong Kang, 2005. "Compensation Design and Career Concerns of Fund Manager," Review of Quantitative Finance and Accounting, Springer, vol. 24(4), pages 379-397, June.
    • Handle: RePEc:kap:rqfnac:v:24:y:2005:i:4:p:379-397
    DOI: 10.1007/s11156-005-7019-5
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    1. Dorra Najar, 2017. "Private equity managers’ fees: estimation and sensitivity analysis using Monte Carlo simulation," Review of Quantitative Finance and Accounting, Springer, vol. 48(1), pages 239-263, January.

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