Should fund managers’ salaries be linked to annual performance of funds?

The China Securities Regulatory Commission (CSRC), the Chinese equivalent of Sebi, has surprised the global fund management industry by proposing salary cuts of up to 50% for fund managers whose funds underperform their benchmarks by 10% or more annually. This move has sparked an industry-wide debate on whether fund managers should be penalised for underperformance—especially over the long term.

We looked at the performance of different categories of mutual funds vis-à-vis their respective benchmarks. As of the end of February, only 14 out of 32 large-cap funds managed to outperform their benchmarks over a one-year period. Among large and mid-cap funds, 20 out of 32 outperformed their respective benchmarks.

Interestingly, more than 50% of the funds in the mid- and small-cap categories outperformed their respective benchmarks—86% of mid-cap funds and 79% of small-cap funds did so during the same period. However, this performance varies across timeframes, and it is difficult to make a long-term judgment based on short-term data.

Expectedly, the mutual fund industry is not in favour of penalising fund managers for what it calls short-term underperformance.

Aashish P. Somaiyaa, Executive Director and CEO of WhiteOak Capital Mutual Fund, acknowledges that while some countries have similar practices, fund managers often stick to disciplined risk management and long-term strategies. This approach can sometimes lead to temporary underperformance, particularly when markets reward riskier, cyclical bets.

Penalising fund managers for short-term underperformance, he argues, could lead to poor decision-making—such as hugging benchmarks or chasing short-term trends—rather than focusing on long-term fundamentals. He believes that understanding the context behind a fund’s performance is more important than rigidly applying performance metrics.

Radhika Gupta, Managing Director and CEO of Edelweiss Asset Management, echoes Somaiyaa’s views. She warns that an excessive focus on short-term performance—such as cutting pay by 50% for a single year of underperformance—would discourage fund managers from taking necessary risks and push them toward short-term thinking at the expense of long-term outcomes.

Gupta acknowledges concerns about fund manager accountability but points out that they already have significant “skin in the game.” Many invest their own money into the funds they manage—often beyond regulatory mandates, which require at least 20% of salary to be invested, but in some cases reaching up to 70% of personal investments. She adds that bonuses, ESOPs, career progression, and reputation are all directly tied to fund performance.

Given India’s strong governance frameworks, regulatory scrutiny, and public disclosure requirements, Gupta believes additional punitive measures are unnecessary. Market incentives and existing structures already drive fund managers to perform over the long term, she says.

Dhirendra Kumar, Founder and CEO of mutual fund tracking firm Value Research, describes the Chinese regulator’s proposal as tricky for open-ended funds with daily NAVs. He suggests using rolling 1-, 3-, or 5-year performance data to determine fund managers’ remuneration instead.

Kumar also proposes that fund houses consider clawbacks on bonuses if managers consistently underperform. Additionally, he suggests making fund manager salaries a “moving target”—where compensation decreases when NAVs decline. Bonus caps and profit-sharing models could also be effective tools for linking fund manager pay more closely to long-term performance, he adds.