Compensation Structures for Vanilla Managers

Compensation structures for hedge fund employees can be fairly straightforward. But in Mutual Fund land things can get a bit more complicated. The past few years have seen many of the firms adopt similar structures that, at least theoretically, reward good performance and retain talent. Morningstar has an excellent piece out on this topic today, well worth the read, as they continue to zero in on stewardship issues and provide fund investors value-add.

Sentinel and Wasatch are a couple of smaller fund shops with compensation plans we like. Sentinel pays bonuses to managers based on their fund’s performance relative to its Morningstar category, with 25% based on one-year performance, 50% on three-year performance, and 25% on five-year performance. Managers get no bonus for a given period if their fund is below the category median, with the maximum bonus for ranking in the category’s top 10%; also, part of the bonus is deferred, providing an incentive for the manager to stick around. Wasatch has a similar plan, with bonuses based mostly on equally weighted one-, three-, and five-year returns versus a peer group, though part of the bonus is also based on less-quantitative factors. Morningstar

Author David Kathman is less enamored with the structure in place at Gabelli, no surprise given the static Mario has received over the years.

Why Manager Compensation Matters
Morningstar

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