Director Compensation Diverges as Larger Boards Boost Pay

Fund directors received an average 2.8% pay raise last year, but the increases were spread unevenly, with boards of larger fund complexes approving increases of nearly 5% and those of smaller fund families more likely to keep compensation steady, according to a new survey.

Many boards have also restructured their compensation packages, allocating extra pay to board and committee leadership roles, according to the 18th annual survey by Management Practice. Despite a recent trend to cut meeting fees in favor of flat retainers, boards have been expressing interest in a return to flexible pay structures that allow additional pay in extraordinary circumstances, the survey found.

The survey found that 20% to 30% of boards received pay hikes last year. Of those, many upped pay by 10% or more, particularly those that only review their compensation every few years, according to Jay Keeshan, a partner at Management Practice.

Pay increases have leveled off compared with 2009, when director compensation jumped 7% on average, according to a previous survey. By contrast, most boards decided to keep pay flat in 2008 due to market turmoil, the firm found.

The fund boards that approved larger increases last year were facing heftier workloads due to increasingly complex investments and greater regulatory burdens, Keeshan says. Many took on new responsibilities due to mergers and restructurings that eliminated some boards and shifted their duties to others, he says.

“I don’t see director pay stabilizing anytime soon due to the continually increasing scope of responsibilities,” Keeshan says. “This is particularly the case for boards governing more dynamic, progressive fund families.”

The survey reviewed SEC filings on last year’s compensation for 1,971 directors from 374 fund families. Compensation varied widely, from averages of roughly $10,000 for the directors of small fund complexes managing $300 million or less to about $240,000 for directors of fund families overseeing $85 billion or more, according to the survey.

The median pay for all directors in the survey was about $69,000, although that number is skewed by the many directors of smaller funds who earn lower pay, Keeshan says.

A quick look at recent SEC filings for a few of the largest fund complexes shows a wide range of pay packages for directors. For instance, independent directors of one of the American Funds’ clusters earned between $124,250 and $327,937, while at Dreyfus, Joseph DiMartino, the board chair and former president, earned $1,060,250 last year.

DiMartino chairs the boards of all 169 mutual funds in the Dreyfus family and is paid an average of $6,273 for each fund, according to a firm spokeswoman, Patrice Kozlowski. His 40 years of experience at Dreyfus include nearly a quarter century working on portfolio management, trading, product development and sales, service, chief investment officer-related responsibilities, financial and legal matters, Kozlowski says.

It’s essential for fund boards to attract professionals who have the expertise to oversee complicated matters such as securities lending and derivatives, says Laura Lutton, editorial director for mutual fund research at Morningstar.

“If the fund board wants really knowledgeable, really experienced individuals who are willing to treat this like a full-time job, you’re going to have to pay for that,” Lutton says. “A lot of the higher salaries we see for trustee compensation just reflect the earning power of these individuals outside of the boardroom.”

The survey found that the vast majority of independent board chairs and lead independent directors receive extra fees, and committee chairs are also increasingly likely to earn additional compensation. In recent years, many fund boards also have moved away from paying board members based on the number of meetings they attend, according to the survey. Instead, boards are more likely to pay flat retainers.

For many boards, “the duties were becoming less periodic and more of a steady flow of interaction throughout the year, so board meetings became less relevant as a driver of compensation,” Keeshan says. “This, along with the fact that most had virtually 100% attendance at meetings, got many boards thinking that a flat retainer to cover all board activities, including education, was easier to manage and just made more sense.”

Even so, the market disruptions of the last few years have prompted more interest in pay structures that allow additional compensation if circumstances warrant, up to an annual maximum, according to Keeshan.

Mutual fund boards appear to be following the lead of many publicly traded operating companies that are downplaying the importance of meeting fees, according to experts on compensation.

At companies where meeting fees are emphasized, “I have had CEOs and chairmen say they have specifically avoided more frequent meetings because of the costs,” says Paul Dorf, managing director at Compensation Resources.

Paying a flat retainer allows boards to respond to market conditions by meeting more frequently without overburdening funds financially, he says. More predictable pay packages also make it easier to grant deferred compensation, he notes. Besides, he says, board members do not want to be “treated like school kids” and rewarded for simply showing up.

Allocating extra pay to board leaders is another good practice, Dorf says. “That’s become the standard. More responsibility is put on them, more focus is put on them.”

Directors are also responding to intense public criticism of pay packages that are perceived as overly generous, he says. “Just looking at boards in general, there are boards that have really understood what’s happening in the marketplace and recognized that it is imprudent to be going hog wild on increases for anybody, themselves or executives,” Dorf says.

In addition to analyzing board compensation according to assets under management, the new survey also assigned a “degree of difficulty” to each fund board, depending on measures such as complexity of investments, oversight of subadvisers and introduction of new funds. Board members facing the least complexity earned $15,000 on average, while those coping with the greatest challenges earned nearly $187,000 on average.

“In the past two years, the Dow has been down approximately 50% and up 100%,” Keeshan says. “Boards trying to base pay on assets could easily be whipsawed. But more importantly, assets are not as much of a factor in the workload when compared to the myriad other elements that affect the board’s responsibilities.”

Such measures are an important component of board compensation, according to fund experts.

“If a board has a lot more funds or more alternative strategies, I could see their decisions being more difficult,” says Sasha Franger, a fiduciary research analyst at Lipper. “I do think that the degree of difficulty is a factor to take into account. Also, how many board meetings a year are they attending? Those could be causes for the variation in board compensation.”

Setting compensation is “an art rather than a science. There are a lot of intangible qualities to evaluate,” says Burt Greenwald, managing director of BJ Greenwald Associates and the lead independent director of Franklin Managed Trust and Franklin Value Investors Trust.

“Most boards today are trying not to be outliers. They want trustees and directors to be fairly compensated, and that means [staying] reasonably close to the mean,” Greenwald says. “On the other hand, they don’t want directors to be underpaid because that risks not being able to attract qualified and talented people as well as being discouraging to existing board members.”

According to the survey, 86% of fund directors are independent and 95% of boards would comply with the SEC’s “super majority” proposal, which would require that chairs and at least 75% of board members be independent. The likelihood that a board’s chair is independent has risen from 60% three years ago to 70%, the survey found.

The most frequently reported retirement age remains 72, although more boards are expressing interest in director emeritus programs. The survey also found a slight increase in the number of female directors, from 15% in 2009 to 17% last year. That trend appears likely to continue, with women making up 20% of newly appointed directors.

“There’s a heightened awareness of the importance of diversity on the boards, no question about that,” Greenwald says. “This is a topic that has really captured the interest and the attention of many boards. I’m confident you will see substantial progress in boards becoming more diversified in the years ahead, and it will happen at a much faster rate than we have seen in the past.”