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Monday, October 24, 2005

Another Look at Performance-Based Pay

by: Theresa Sim

A recent study out of Insead comes to an interesting conclusion about performance-based pay among mutual fund managers.

According to the study, managers whose pay is tied to performance tend to work differently from their non-performance-based peers during a bubble. For instance, managers with pay on the line tended to stray from the investing herd during the last dot-com bubble. While their peers were investing heavily in bubble stocks, incentive-based managers focused more on "old-economy" stocks, write the researchers.

With high-enough contractual incentives, the prospect of ranking at the top by diverging from the bubble would more than offset the incentives to have a high, but not the best, performance by riding the bubble," wrote the researchers.

Researchers Massimo Massa, Nishant Dass and Rajdeep Patgiri even go so far to say that incentive-based managers may serve as a "useful counterweight" to future bubbles.  

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