Director Compensation Grows As Funds Become More Complex

Compensation for mutual fund directors increased more than 7% between 2008 and 2009, largely because of more meetings and more assets in the coffers, shows an annual survey from Management Practice Inc.

The findings for 2009 contrast with those a year earlier, when most boards decided to forgo pay increases because of the market crisis, says Jay Keeshan, a partner at Management Practice.

We saw a return to normalcy when the markets came back and asset levels started to return,” Keeshan says. The firm’s 17th annual Survey of Mutual Fund Director/Trustee Compensation and Governance Practices collected data from 1,902 directors at 374 fund families.

The Management Practice survey covers a wide range of compensation, from directors making $10,000 per year to one who pulled in $800,000. The survey found that the 2009 median compensation for directors of funds with between $9 billion and $25 billion was $118,324; it was $246,782 for funds with more than $100 billion.

That’s up slightly from the year before, when the median for directors of funds with between $9 billion and $25 billion was $117,500 and $191,820 for trustees of the larger funds. And it far outpaces compensation in 2007, which was $77,942 and $194,500, respectively. Management Practice warns that median compensation figures can’t be compared year-to-year because of the large swing in asset sizes for the fund complexes that were measured — 40% or more in an 18-month period, in some cases.

Because of the difficulty in accurately assessing director compensation based only on asset size or number of funds overseen, Management Practice has developed a matrix that shows how pay relates to the complexity of a director’s job, with greater complexity translating to higher pay. Complexity is determined by such factors as whether the director oversees subadvisers, how much the fund is leveraged, whether the fund is open- or closed-ended, and the complexity of the fund’s investments.

“Up until very recently, the standard was to look at assets under management, and triangulate that with the number of funds,” Keeshan says. “But you can have $1 trillion in 10 large funds that are easy to govern. Or you can have a start-up fund or a very small fund that is very complex.”

Another instance in which more complexity equaled higher pay was for chairs of such committees as audit, investment and compliance, the survey found. Fees paid for committee chairmanships increased in 2009, especially for larger funds.

The committee chairmanship fee increases are partially due to the increased workload, as well as an increased focus on regulatory and compliance issues and the increase in exposure to potential legal liability.

The survey captured a significantly different approach to compensation in its most recent study than it did in 2007 and 2008, when most boards kept their compensation flat. Just a handful enjoyed compensation increases, while another small group took pay cuts, Keeshan says. The latter group refused compensation during that period mainly by skipping payments they would have been owed for the extra meetings held as the markets went haywire.

As the financial crisis hit full force by the fourth quarter of 2008, boards were meeting weekly and sometimes daily. But with investors in their funds “getting clobbered,” most boards saw that stepping up their pay, even for an increased workload, would have been a bad idea, Keeshan says.

“There was a sympathy factor in the fourth quarter, when frankly all of us thought the world was going to end,” he says. “A majority of boards have meeting fees. Many directors capped their pay, held their pay flat, and said, ‘Let’s just take what we got last year and leave it at that.’”

As the markets turned around in 2009, boards started accepting payments for meetings again, Keeshan says, and some boards took on pay increases because fund mergers increased their fund families’ asset sizes significantly. But the increase from 2008 generally wasn’t a result of boards' deciding to give themselves a raise on their base pay, he says.

Burt Greenwald, managing director of BJ Greenwald Associates in New York, says that mutual fund boards are unlikely to revisit their compensation arrangements until asset growth is renewed. But even when times are better for the industry, compensation may not necessarily increase, says Greenwald, who is also the lead independent director of Franklin Managed Trust and Franklin Value Investors Trust.

Compensation “is judged by the environment and circumstances relevant at that time,” he says. A board’s compensation review will likely include an evaluation of the market environment that the funds are operating in, and of the time and effort required to discharge their responsibilities, he says.

“We’ve been through one of the most difficult stock market environments that our generation has ever seen. [Boards] are unlikely to increase compensation with such a sharp decline in the value of assets,” Greenwald says, adding that board members have spent more time on the job than ever before.

The complexity of the mutual fund director’s job has increased because of the greater responsibility for overseeing risk control and valuation issues in a volatile market, Greenwald says. And, he says, regulators are shining more of a spotlight on the role that directors play.

That makes board members all the more accountable to shareholders, says Paul Dorf, managing director at Compensation Resources.

“Boards are much more serious than they were before,” he says. “We’ve seen that boards are really starting to place a much greater emphasis on what they’re supposed to be.”

The governance side of Management Practice’s survey found that 85% of all fund board members are independent and 95% of fund boards already comply with the SEC’s proposed “super-majority” rule. Proposed SEC rules, which the commission had put on the back burner but may now be revisiting, would mandate that mutual funds have an independent chairman and a “super-majority” of independent directors, or 75%.

According to the survey, board chairmen in 2009 were independent 70% of the time, 10 percentage points more than three years ago.

Management Practice’s survey also found a high concentration of assets at the top of the mutual fund industry, with the top 25 fund families controlling about 68% of the industry’s assets under management. The 25 fund complexes have about 212 directors, and on average each of those directors oversees about $31 billion — more than even directors of companies traded on the New York Stock Exchange.

Of the fund complexes surveyed, 81% have a mandatory retirement age, most at the age of 72. But the survey also found that respondents reported a continuing trend toward extending the tenure of experienced directors, with some boards believing that fund shareholders benefit from the long-term perspective offered by these board members. That’s mainly because of the increasing number and complexity of regulatory and business issues over the past several years, Management Practice reported. On the other hand, some boards reported a belief that “fresh ideas” on a board are important for shareholder protection.

With recent SEC disclosure rules focusing attention on the diversity of fund boards, Management Practice pointed out that its survey found that 15% of fund directors are women, while more than 20% of the newly appointed directors in 2008 and 2009 were women. Many of the new directors appointed in 2008 and 2009 had an investment background.