Peer Versus Pure Benchmarks in the Compensation of Mutual Fund Managers

Richard Evans, Juan-Pedro Gómez, Linlin Ma and Yuehua Tang

Journal of Financial and Quantitative Analysis, 2024, vol. 59, issue 7, 3101-3138

Abstract: We examine the role of peer (e.g., Lipper manager indices) versus pure (e.g., S&P 500) benchmarks in fund manager compensation. We model their impact on manager incentives and then test those predictions using novel data. We find that 71% of managers are compensated based on peer benchmarks. Consistent with the model, peer-benchmarked fund managers exhibit higher effort generating higher gross performance and collect higher fee income. Analyzing advisors’ choice between benchmark types, we show that peer-benchmarking advisors cater to more sophisticated and performance-sensitive investors, and are more likely to sell through direct channels, consistent with investor heterogeneity and market segmentation.

Date: 2024
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