Hostname: page-component-cd9895bd7-8ctnn Total loading time: 0 Render date: 2024-12-21T12:17:25.116Z Has data issue: false hasContentIssue false
  • English
  • Français

Paying Managers of Complex Portfolios: Evidence on Compensation and Performance from Endowments

Published online by Cambridge University Press:  01 March 2024

Matteo Binfarè Open the ORCID record for Matteo Binfarè [Opens in a new window]  and
Robert S. Harris
Matteo Binfarè*
Affiliation:
University of Missouri Robert J. Trulaske Sr. College of Business
Robert S. Harris
Affiliation:
University of Virginia Darden School of Business harrisr@darden.virginia.edu
*
mbinfare@missouri.edu (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We examine compensation for endowment Chief Investment Officers (CIOs) overseeing portfolios with significant allocations to alternatives. We find widespread use of bonuses and that large endowments with high alternative allocations hire CIOs with stronger backgrounds, pay them more, and have higher pay-for-performance sensitivity. We find weak evidence of a relationship between compensation and future performance. Our results align with contract theory predictions but differ from empirical findings on pension funds. Endowments pay CIOs more, rely more on bonuses, attract more experienced professionals, and have lower turnover than pensions. This suggests more effective talent management compared to politically influenced public pensions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 35
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2024. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Brad Barber, Hendrik Bessembinder (the editor), Justin Birru, Greg Brown, Yong Chen, Nathan Dong, Jonathan Fluharty, Thomas Gilbert, Juan-Pedro Gómez, Amit Goyal, Jillian Grennan, Fotis Grigoris, Umit Gurun, Victoria Ivashina, Steven Kaplan, Aymen Karoui, Josh Lerner, Francis Longstaff, Stefano Pegoraro, Philipp Schnabl, Stephan Siegel, Yuehua Tang (the referee), Jay Wang, and conference participants at the 2022 Eastern Finance Association, the 33rd Australasian Finance and Banking Conference (AFBC), the 2020 Financial Management Association, the 2020 Southern Finance Association, and Korea University Business School for helpful comments and suggestions. Du Nguyen and Kyle Zimmerschied provided excellent research assistance. A previous version of the article circulated under the title “What Drives Pay for Chief Investment Officers At Endowments?” All errors are our own.

References

Abadie, A., and Imbens, G. W.. “Matching on the Estimated Propensity Score.” Econometrica, 84 (2016), 781–807. doi:10.3982/ecta11293.CrossRefGoogle Scholar
Adelino, M.; Lewellen, K.; and Sundaram, A.. “Investment Decisions of Nonprofit Firms: Evidence from Hospitals.” Journal of Finance, 70 (2015), 1583–1628. doi:10.1111/jofi.12234.CrossRefGoogle Scholar
Agarwal, V.; Daniel, N. D.; and Naik, N. Y.. “Role of Managerial Incentives and Discretion in Hedge Fund Performance.” Journal of Finance, 64 (2009), 2221–2256.CrossRefGoogle Scholar
Andonov, A.; Hochberg, Y. V.; and Rauh, J. D.. “Political Representation and Governance: Evidence from the Investment Decisions of Public Pension Funds.” Journal of Finance, 73 (2018), 2041–2086.CrossRefGoogle Scholar
Babenko, I.; Bennett, B.; and Sen, R.. “Regulating CEO Pay: Evidence from the Nonprofit Revitalization Act.” SSRN Electronic Journal (2021). doi:10.2139/ssrn.3777576.CrossRefGoogle Scholar
Bai, J. J.; Ma, L.; Mullally, K. A.; and Tang, Y.. “Are Mutual Fund Managers Paid for Performance? Evidence from US Administrative Earnings Data” (2023).CrossRefGoogle Scholar
Barber, B. M., and Wang, G.. “Do (Some) University Endowments Earn Alpha?” Financial Analysts Journal, 69 (2013), 26–44.CrossRefGoogle Scholar
Begenau, J.; Siriwardane, E.; and Liang, P.. “Unpacking the Rise in Alternatives.” Available at SSRN 4105813 (2022).CrossRefGoogle Scholar
Bénabou, R., and Tirole, J.. “Incentives and Prosocial Behavior.” American Economic Review, 96 (2006), 1652–1678.CrossRefGoogle Scholar
Berk, J. B., and Green, R. C.. “Mutual Fund Flows and Performance in Rational Markets.” Journal of Political Economy, 112 (2004), 1269–1295.CrossRefGoogle Scholar
Berk, J. B., and van Binsbergen, J. H.. “Measuring Skill in the Mutual Fund Industry.” Journal of Financial Economics, 118 (2015), 1–20. doi:10.1016/j.jfineco.2015.05.002.CrossRefGoogle Scholar
Bertrand, M., and Schoar, A.. “Managing with Style: The Effect of Managers on Firm Policies.” Quarterly Journal of Economics, 118 (2003), 1169–1208.CrossRefGoogle Scholar
Besley, T., and Ghatak, M.. “Competition and Incentives with Motivated Agents.” American Economic Review, 95 (2005), 616–636.CrossRefGoogle Scholar
Binfarè, M.; Brown, G.; Harris, R.; and Lundblad, C.. “How Does Human Capital Affect Investing? Evidence from University Endowments.” Review of Finance, 27 (2022), 143–188. doi:10.1093/rof/rfac017.CrossRefGoogle Scholar
Binfarè, M., and Zimmerschied, K.. “Investing with Purpose: Evidence from Private Foundations.” SSRN Electronic Journal (2023). doi:10.2139/ssrn.4057652.CrossRefGoogle Scholar
Brown, J. R.; Dimmock, S. G.; Kang, J.-K.; Richardson, D.; and Weisbenner, S.. “The Governance of University Endowments: Insights from a TIAA-CREF Institute Survey.” TIAA-CREF Institute Research Dialogue, 102 (2011), 1–15.Google Scholar
Brown, J. R.; Dimmock, S. G.; Kang, J.-K.; and Weisbenner, S. J.. “How University Endowments Respond to Financial Market Shocks: Evidence and Implications.” American Economic Review, 104 (2014), 931–962. doi:10.1257/aer.104.3.931.CrossRefGoogle Scholar
Brown, K. C.; Garlappi, L.; and Tiu, C.. “Asset Allocation and Portfolio Performance: Evidence from University Endowment Funds.” Journal of Financial Markets, 13 (2010), 268–294.CrossRefGoogle Scholar
Brown, K. C., and Tiu, C.. “Do Endowment Funds Select the Optimal Mix of Active and Passive Risks?” Journal of Investment Management, 62 (2010), 1–34.Google Scholar
Butler, A. W., and Gurun, U. G.. “Educational Networks, Mutual Fund Voting Patterns, and CEO Compensation.” Review of Financial Studies, 25 (2012), 2533–2562. doi:10.1093/rfs/hhs067.CrossRefGoogle Scholar
Cavagnaro, D. R.; Sensoy, B. A.; Wang, Y.; and Weisbach, M. S.. “Measuring Institutional Investors’ Skill at Making Private Equity Investments.” Journal of Finance, 74 (2019), 3089–3134.CrossRefGoogle Scholar
Cejnek, G.; Franz, R.; Randl, O.; and Stoughton, N.. “A Survey of University Endowment Management Research.” Journal of Investment Management, Third Quarter (2014).CrossRefGoogle Scholar
Chaudhuri, R.; Ivković, Z.; Pollet, J.; and Trzcinka, C.. “A Tangled Tale of Training and Talent: PhDs in Institutional Asset Management.” Management Science, 66 (2020), 5623–5647.CrossRefGoogle Scholar
Chevalier, J., and Ellison, G.. “Are Some Mutual Fund Managers Better Than Others? Cross-Sectional Patterns in Behavior and Performance.” Journal of Finance, 54 (1999a), 875–899. doi:10.1111/0022-1082.00130.CrossRefGoogle Scholar
Chevalier, J., and Ellison, G.. “Career Concerns of Mutual Fund Managers.” Quarterly Journal of Economics, 114 (1999b), 389–432.CrossRefGoogle Scholar
Core, J. E., and Guay, W. R.. “Stock Option Plans for Non-Executive Employees.” Journal of Financial Economics, 61 (2001), 253–287.CrossRefGoogle Scholar
Cuoco, D., and Kaniel, R.. “Equilibrium Prices in the Presence of Delegated Portfolio Management.” Journal of Financial Economics, 101 (2011), 264–296.CrossRefGoogle Scholar
Custódio, C.; Ferreira, M. A.; and Matos, P.. “Generalists Versus Specialists: Lifetime Work Experience and Chief Executive Officer Pay.” Journal of Financial Economics, 108 (2013), 471–492. doi:10.1016/j.jfineco.2013.01.001.CrossRefGoogle Scholar
Custódio, C.; Ferreira, M. A.; and Matos, P.. “Do General Managerial Skills Spur Innovation?” Management Science, 65 (2019), 459–476. doi:10.1287/mnsc.2017.2828.CrossRefGoogle Scholar
Dahiya, S., and Yermack, D.. “Investment Returns and Distribution Policies of Non-Profit Endowment Funds.” SSRN Electronic Journal (2021), doi:10.2139/ssrn.3291117.CrossRefGoogle Scholar
Das, S. R., and Sundaram, R. K.. “Fee Speech: Signaling, Risk-Sharing, and the Impact of Fee Structures on Investor Welfare.” Review of Financial Studies, 15 (2002), 1465–1497.CrossRefGoogle Scholar
Di Tella, S., and Sannikov, Y.. “Optimal Asset Management Contracts with Hidden Savings.” Econometrica, 89 (2021), 1099–1139.CrossRefGoogle Scholar
Dong, G. N. “Wage Dispersion and Financial Performance of Nonprofit Hospitals.” Journal of Health Care Finance, 43 (2016), 1–23.Google Scholar
Duke, U. “DUMAC Investment Performance Snapshot” (2019).Google Scholar
Dyck, A.; Manoel, P.; and Morse, A.. “Outraged by Compensation: Implications for Public Pension Performance.” Review of Financial Studies, 35 (2022), 2928–2980.CrossRefGoogle Scholar
Evans, R. B.; Gomez, J.-P.; Ma, L.; and Tang, Y.. “Peer Versus Pure Benchmarks in the Compensation of Mutual Fund Managers.” SSRN Electronic Journal (2022). doi:10.2139/ssrn.3441308.CrossRefGoogle Scholar
Falato, A.; Li, D.; and Milbourn, T.. “Which Skills Matter in the Market for CEOs? Evidence from Pay for CEO Credentials.” Management Science, 61 (2015), 2845–2869.CrossRefGoogle Scholar
Fama, E. F., and Jensen, M. C.. “Agency Problems and Residual Claims.” Journal of Law and Economics, 26 (1983), 327–349.CrossRefGoogle Scholar
Fernandes, N.; Ferreira, M. A.; Matos, P.; and Murphy, K. J.. “Are U.S. CEOs Paid More? New International Evidence.” Review of Financial Studies, 26 (2012), 323–367. doi:10.1093/rfs/hhs122.CrossRefGoogle Scholar
Finley, A.; Hall, C. M.; and Marino, A.. “Executive Gender Pay Gaps in Nonprofit Organizations.” Available at SSRN 3385848 (2019)CrossRefGoogle Scholar
Frumkin, P., and Keating, E. K.. “The Price of Doing Good: Executive Compensation in Nonprofit Organizations.” Policy and Society, 29 (2010), 269–282.CrossRefGoogle Scholar
Frydman, C. “Rising Through the Ranks: The Evolution of the Market for Corporate Executives, 1936–2003.” Management Science, 65 (2019), 4951–4979. doi:10.1287/mnsc.2018.3080.CrossRefGoogle Scholar
Frydman, C., and Saks, R. E.. “Executive Compensation: A New View from a Long-Term Perspective, 1936–2005.” Review of Financial Studies, 23 (2010), 2099–2138. doi:10.1093/rfs/hhp120.CrossRefGoogle Scholar
Gabaix, X., and Landier, A.. “Why Has CEO Pay Increased So Much?” Quarterly Journal of Economics, 123 (2008), 49–100.CrossRefGoogle Scholar
Galle, B., and Walker, D. I.. “Nonprofit Executive Pay as an Agency Problem: Evidence from US Colleges and Universities.” BUL Review, 94 (2014), 1881.Google Scholar
Gilbert, T., and Hrdlicka, C.. “Why Are University Endowments Large and Risky?” Review of Financial Studies, 28 (2015), 2643–2686.CrossRefGoogle Scholar
Glazer, A., and Konrad, K. A.. “A Signaling Explanation for Charity.” American Economic Review, 86 (1996), 1019–1028.Google Scholar
Graham, J. R.; Harvey, C. R.; and Puri, M.. “Managerial Attitudes and Corporate Actions.” Journal of Financial Economics, 109 (2013), 103–121. doi:10.1016/j.jfineco.2013.01.010.CrossRefGoogle Scholar
Graham, J. R.; Li, S.; and Qiu, J.. “Managerial Attributes and Executive Compensation.” Review of Financial Studies, 25 (2012), 144–186.CrossRefGoogle Scholar
Hansmann, H. “Why Do Universities Have Endowments?” Journal of Legal Studies, 19 (1990), 3–42.CrossRefGoogle Scholar
Harris, R. S.; Jenkinson, T.; Kaplan, S. N.; and Stucke, R.. “Financial Intermediation in Private Equity: How Well Do Funds of Funds Perform?” Journal of Financial Economics, 129 (2018), 287–305.CrossRefGoogle Scholar
Hartzell, J. C.; Parsons, C. A.; and Yermack, D. L.. “Is a Higher Calling Enough? Incentive Compensation in the Church.” Journal of Labor Economics, 28 (2010), 509–539.CrossRefGoogle Scholar
Heinkel, R., and Stoughton, N. M.. “The Dynamics of Portfolio Management Contracts.” Review of Financial Studies, 7 (1994), 351–387.CrossRefGoogle Scholar
Hwang, S.; Shivdasani, A.; and Simintzi, E.. “Mandating Women on Boards: Evidence from the United States.” SSRN Electronic Journal (2018). doi:10.2139/ssrn.3265783.CrossRefGoogle Scholar
Ibert, M.; Kaniel, R.; Van Nieuwerburgh, S.; and Vestman, R.. “Are Mutual Fund Managers Paid for Investment Skill?” Review of Financial Studies, 31 (2017), 715–772.CrossRefGoogle Scholar
Kang, S.-H.; Kumar, P.; and Lee, H.. “Agency and Corporate Investment: The Role of Executive Compensation and Corporate Governance.” Journal of Business, 79 (2006), 1127–1147.CrossRefGoogle Scholar
Kaplan, S. N.; Klebanov, M. M.; and Sorensen, M.. “Which CEO Characteristics and Abilities Matter?” Journal of Finance, 67 (2012), 973–1007. doi:10.1111/j.1540-6261.2012.01739.x.CrossRefGoogle Scholar
Khorana, A.; Servaes, H.; and Wedge, L.. “Portfolio Manager Ownership and Fund Performance.” Journal of Financial Economics, 85 (2007), 179–204.CrossRefGoogle Scholar
Kostovetsky, L., and Warner, J. B.. “You’re Fired! New Evidence on Portfolio Manager Turnover and Performance.” Journal of Financial and Quantitative Analysis, 50 (2015), 729–755. doi:10.1017/s0022109015000125.CrossRefGoogle Scholar
Lerner, J.; Schoar, A.; and Wang, J.. “Secrets of the Academy: The Drivers of University Endowment Success.” Journal of Economic Perspectives, 22 (2008), 207–222.CrossRefGoogle Scholar
Li, C. W., and Tiwari, A.. “Incentive Contracts in Delegated Portfolio Management.” Review of Financial Studies, 22 (2009), 4681–4714.CrossRefGoogle Scholar
Li, H.; Zhang, X.; and Zhao, R.. “Investing in Talents: Manager Characteristics and Hedge Fund Performances.” Journal of Financial and Quantitative Analysis, 46 (2011), 59–82.CrossRefGoogle Scholar
Lo, A. W.; Matveyev, E.; and Zeume, S.. “The Risk, Reward, and Asset Allocation of Nonprofit Endowment Funds.” SSRN Electronic Journal (2021). doi:10.2139/ssrn.3560240.CrossRefGoogle Scholar
Lu, Y.; Mullally, K.; and Ray, S.. “Paying for Performance in Public Pension Plans.” Management Science 69 (2022), 4363. doi:10.2139/ssrn.3781915.Google Scholar
Lu, Y., and Teo, M.. “Do Alpha Males Deliver Alpha? Facial Width-to-Height Ratio and Hedge Funds.” Journal of Financial and Quantitative Analysis, 57 (2021), 1–57.Google Scholar
Ma, L.; Tang, Y.; and Gómez, J.-P.. “Portfolio Manager Compensation in the US Mutual Fund Industry.” Journal of Finance, 74 (2019), 587–638.CrossRefGoogle Scholar
Northwestern University. “Northwestern University Investment Performance” (2019).Google Scholar
Ou-Yang, H. “Optimal Contracts in a Continuous-Time Delegated Portfolio Management Problem.” Review of Financial Studies, 16 (2003), 173–208.CrossRefGoogle Scholar
Oyer, P. “Why Do Firms Use Incentives That Have No Incentive Effects?” Journal of Finance, 59 (2004), 1619–1650.CrossRefGoogle Scholar
Pegoraro, S. “Incentives and Performance with Optimal Money Management Contracts.” Journal of Political Economy, 131 (2023), 2920–2968.CrossRefGoogle Scholar
Rosenbaum, P. R., and Rubin, D. B.. “The Central Role of the Propensity Score in Observational Studies for Causal Effects.” Biometrika, 70 (1983), 41–55. doi:10.1093/biomet/70.1.41.CrossRefGoogle Scholar
Sensoy, B. A.; Wang, Y.; and Weisbach, M. S.. “Limited Partner Performance and the Maturing of the Private Equity Industry.” Journal of Financial Economics, 112 (2014), 320–343.CrossRefGoogle Scholar
Smith, C. W. Jr, and Watts, R. L.. “The Investment Opportunity Set and Corporate Financing, Dividend, and Compensation Policies.” Journal of Financial Economics, 32 (1992), 263–292.CrossRefGoogle Scholar
Tervio, M. “The Difference That CEOs Make: An Assignment Model Approach.” American Economic Review, 98 (2008), 642–668. doi:10.1257/aer.98.3.642.CrossRefGoogle Scholar
Tiu, C. I. “Organic Benchmarks for University Endowments.” TIAA Institute Research Dialogue, March (2017).Google Scholar
Supplementary material: File

Binfarè and Harris supplementary material

Binfarè and Harris supplementary material
Download Binfarè and Harris supplementary material(File)
File 300.9 KB