Management Compensation Incentive And Restraint Mechanism On The Equity Open-end Funds

The open-end funds in China have been charged management compensation by the fixed proportion of NAV since the foundation in Sept. 2001. Although fund investors suffering serious losses from the stock market crash in 2008, the total amount of management compensation charged by fund managers increases instead of decrease, which makes fund holders strongly dissatisfied. Then, the management compensation arouses wide attention of the people from fund industry and academia. The management compensation contract which is“ensure stable yields despite drought or excessive rain”essentially reflects the lack of effectiveness of the funds management compensation incentive and restraint mechanism in China.This paper describes the current situation of the compensation incentive, and finds that management compensation vary with the size of the fund while its relationship with fund performance is uncertain. Then, based on the incentive theory of economic and management, the paper analyses probable behaviors that fund managers may adopt in different compensation contracts. It conducts an empirical study on the current fund management compensation incentive and restraint mechanism in China by taking equity open-end funds issued before 2006 as sample, and the results show that the fund management compensation are statistically irrelevant to the fund performance, which further confirms the problem of incentive and restraint for fund manager that caused by current compensation contract.This paper designs a new mixed management compensation contract based on principal-agent analysis framework, which combines the interests of managers and holders by enhancing an interactive development between fund management compensation and fund performance. Making comparative study of the new mixed management compensation contract and current contract, it theoretically proves that the new mixed management compensation contract can make fund managers work harder than the fixed one under the same management compensation Meanwhile, it classifies the sources of fund performance and award and punishment will be adopted to managers only on the performance section linked to fund managers’effort level, in order to keep management compensation consistent with managers’efforts.