Pay-performance sensitivity and firm size: Insights from the mutual fund industry |
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| Authors: | George D Cashman |
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| Institution: | 1. The Olayan School of Business, American University in Beirut, Lebanon;2. Cardiff Business School, Cardiff University, UK;3. European Corporate Governance Institute, Belgium;1. China''s Management Accounting Research & Development Center & School of Accountancy, Central University of Finance and Economics, 39 South College Road, Haidian District, Beijing 100081, China;2. University of Edinburgh Business School, Edinburgh, UK;3. Shanghai University of Finance and Economics, Shanghai, China;1. Shanghai Advanced Institute of Finance, Shanghai Jiatong University, China;2. The Haas School of Business, University of California, Berkeley, CA 94720, United States;3. The Robert H. Smith School of Business, University of Maryland, College Park, MD 20742, United States;4. African Economic Research Consortium (www.aercafrica.org), Nairobi, Kenya |
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| Abstract: | I examine the ex ante decision to make an agent's pay-performance sensitivity an inverse function of organization size. I focus on mutual funds and their decision to use compensation contracts that reduce the advisor's marginal compensation as the fund grows (a declining-rate contract) over the dominant contract type, where marginal compensation is unrelated to fund size (a single-rate contract). I find evidence consistent with the view that declining-rate contracts are a mechanism to keep marginal compensation in line with the advisor's declining marginal product. Specifically, I find that funds with greater exposure to diseconomies of scale are more likely to use a declining-rate contract and to specify a greater amount of compensation decline in their contracts. Consistent with optimal contracting, I find no evidence of a performance difference between funds with declining-rate contracts and funds with single-rate contracts. |
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