Risk and Skill-Adjusted Investment Compensation

$25.00

The recent financial debacle has raised an outcry against the compensation of financial executives and there are increasing calls for regulation of their compensation package.  This article argues that the compensation structure, especially in the investment management area, is severely flawed and needs to be changed immediately.

Author: Arun Muralidhar, Ph.D.

The recent financial debacle has raised an outcry against the compensation of financial executives and there are increasing calls for regulation of their compensation package.  This article argues that the compensation structure, especially in the investment management area, is severely flawed and needs to be changed immediately. This is an industry that is full of principal-agent relationships, and unless performance is appropriately adjusted for risk (and skill), investment professionals may have the incentive to do the wrong things for clients (i.e employ excessive leverage or invest in assets in which they may have little or no expertise or which have little relevance to their mandate).

 

Risk and Skill-Adjusted Investment Compensation

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