What Is Performance-Based Compensation?

Performance-based compensation is an incentive-based form of compensation that can be paid to portfolio managers of investment funds. Regulated mutual funds with performance-based compensation may add approximately 0.20% to their management fees for performance-based incentives. Within the investment industry, 澳洲幸运5官方开奖结果体彩网:hedge fund managers are most well-k🔜nown for receiving high levels of performance-based compe👍nsation.

Performance-based compensation also refers to additional compensation paid out to employees who have🌜 performed above and beyond their job requirements at an extremely high quality.

Understanding Performance-Based Compensation

Performance-based compensation rewards an investment manager or an employee for meeting certain performance targets or for high-quality work. For 澳洲幸运5官方开奖结果体彩网:investment managers, it provides incꦿentives to make smart and risk-appropriate investment choices that result in an appreciation of invested assets. This allows them a percentage of the returns in addition to the managerial fees they charge.

For employees, performance-ꦫbased compensation is a reward for their hard work and acts as an acknowledgment of their contribution to the firm as well as functioning as an incentive to stay with the company. Most employee bonuses are performance-based compensation.

Investment Company Perforꦺmance-Based Compensation

The 澳洲幸运5官方开奖结果体彩网:Investment Company Act of 1940 governs the mutual fund industry and sets certain requirements that have helped to shape the compensation standards for portfolio managers. Investment companies must have a board of directors that approves the compensation schedule of managers.

Companies must also file a registration statement including a prospectus and statement of additional information, clearly and transparently outlining all the information on the fund including compensation.

Standards and documentation for publicly traded funds are geneꦕrally expected to be consistent across the industry for easy comparison by investors. This consistency has also generally led to standardizಞed fees charged by mutual fund managers as part of the fund’s total annual operating expenses.

Mutual fund portfolio management fees can range from 0.46% to 1.16% with 澳洲幸运5官方开奖结果体彩网:active fund managers requiring higher compensation. Portfolio management fees typically comprise the majority of a mutual fund’s 澳洲幸运5官方开奖结果体彩网:total annual operating expenses. Across the industry, mutual fund managers can also receive performance-based fees. These fees are detailed in their registration statement documentation and approved by the board of directors.

Hedge Fund Manager Perform🌜ance-Based Compensation

Across the investment industry, hedge fund managers are more bꦉroadly known for their performance-based fees. Hedge funds are much less regulated than traditional mutual funds and therefore have greater latitude for fee schedule structuring.

They also typically employ m𝐆ore complex strategies that they develop, with the goal of offering higher returns than mutual funds, which they justify as a reason for higher performance-based compensation.

Hedge fund managers will typically charge a "two and twenty" fee schedule requiring higher management fees than mutual funds from their investors. The 澳洲幸运5官方开奖结果体彩网:two and twenty hedge fund fee structure indi🔥cates a flat 2% fee as well as a 20% performance fee🦩.

The 2% fee is based on the fund’s 澳洲幸运5官方开奖结果体彩网:assets under management (AUM). The 20% fee is performance-based compensaꦬtion that is typically triggered when performance outperforms a benchmark by a specified amount. The 20% fee is paid to the hedge fund manager from the 🥂fund’s profits.

Employee Performance-Based Compensation

Employees earn a traditional salary but performance-based compensation seeks to reward them for their high perfo༒rmance above their job requirements. Performance-based compensation is most often awarded as a year-end bonus, though bonuses throughout the year are possible.

Another common performance-based compensation is the awarding of 澳洲幸运5官方开奖结果体彩网:stock options. An employee is given the option to purchase a company's stock at a discount when the price of the stock is above the 澳洲幸运5官方开奖结果体彩网:exercise price. For example, shares of the company could be trading at $100, and the employee is gi♑🃏ven the option to buy at $90.

Performance-based compensation at companies is meant to motivate employees to work harder as they will reap the rewards of its success. In some companies, the funds necessary to supply bonuses are 澳洲幸运5官方开奖结果体彩网:planned as part of the budget.

The Bottom Line

Performance-based compensation rewards fund managers and employees for exceptional performance. Hedge fund managers often use a "two and twenty" fee structure; a 2% management fee and 20% of profits as performance pay.

Mutual funds offer performance-based incentives with clear standards for transparency. Employees in other sectors receive pe♎rformance-based compensation through bonuses or stock options to encourage high-quality work and loyalty to the firm.