We examine the role of peer (e.g., Lipper indices) vs. pure (i.e., market indices) benchmarks in the compensation contract of mutual fund managers. We first model the impact of peer vs. pure benchmarks on fund manager incentives. Then, using a unique hand-collected dataset, we test the...

We study compensation contracts of individual portfolio managers using hand-collected data of over 4,500 U.S. mutual funds. Variations in the compensation structures are broadly consistent with an optimal contracting equilibrium. The likelihood of explicit performance-based incentives is...