Pay for Independent Directors of Mutual Funds Soars in First Half of 2004 Print E-mail
Written by C. Meyrick Payne, Partner, Management Practice Inc. (MPI), consultants to independent directors   

Pay for the independent trustees/directors has risen sharply in the last six months as governance reforms force funds to hold longer and more frequent meetings. In the just completed half yearly update, MPI found that the annual compensation of fund trustees rose 8% in the six months between January and June 2004; or an annual growth rate of 16%. If this holds for the year as a whole it will represent the fastest growth MPI has seen in its ten years of tracking mutual fund director compensation.

In addition, the premium paid to the Chairman, who will shortly be required to be drawn from the independent Board members, has also risen sharply over the premium which used to be paid to the lead independent director. Furthermore, the premium paid to the Audit Committee Financial Expert, a new designation of trustee mandated by the Sarbanes Oxley legislation is also increased.

These findings represent the outward manifestation of the Congress and SEC push to tighten mutual fund governance. In terms of personnel changes, the SEC has required or strongly encouraged five changes to the governance in as many years. First, strong encouragement came for fund boards to have independent counsel. Second, the Sarbanes-Oxley legislation required fund boards to have an Audit Committee Financial Expert. Third, by October 2004, independent trustees are required to have a Chief Compliance Officer accountable directly to the board. Fourth, fund boards will shortly be required to have an independent Chairman. Finally, fund boards are specifically authorized to hire their own staff if necessary. Collectively, these changes manifestly alter the process and procedure of governance.

Growing pressure on directors to act as guardians against everything from market timing and late trading to misuse of "soft dollars" and excessive fees has led to a new spirit of professionalism, more work and higher risks. Recent regulatory changes and legislation have greatly increased both the authority and responsibility of the independent directors of funds. As this has occurred, the fees they earn have also increased. Eliot Spitzer, the NY State Attorney General, understandably unleashed a significant strengthening of governance activity within mutual funds as well as an acute sensitivity to the level of management fees. But these changes come at a fairly high price to fund shareholders. It remains to be seen whether the additional governance costs can be recouped by savings elsewhere.

These changes are not unique to mutual funds. A recent study by Pearl Meyer & Partners of New York show that the average compensation of the largest 200 U.S. companies rose by 13.4% to $177,000 last year. In 2001, the Pearl Meyer study showed that corporate directors put in about 150 hours per year of which 60 were in meetings. Today it is closer to 200 to 250 hours with 80 to 90 in meetings. The studies done by MPI show essentially the same result for mutual fund boards. The Chairman is expected to put in twice as many hours and the Audit Committee Financial Expert, who is almost always the Audit Committee Chair, puts in 50% more.

Each year MPI conducts a survey of trustee compensation. In the year to December 31, 2003 trustees of the largest 50 fund groups received increases of 13% and trustees of the smallest 50 received increases of 18%. This pattern has played out for several years as directors of small fund families realize that their legal and reputational exposure is just as great as their counterparts in larger complexes.

As the governance scene is changing so rapidly, we have tried to provide a half yearly update so that Boards, which typically review compensation in the summer months, have the most recent information available. Between January and June 2004 the average trustee compensation rose 8%. This finding is based on MPI's analysis for 1525 trustees for both 2003 and 2004 that were specifically identified in Statements of Additional Information.

If the 8% increase in the first half of 2004 is repeated in the second half, this year will see the largest annual increase since MPI started to keep track ten years ago.

MPI's experience in helping Boards deal with compensation issues is that the trustees themselves are acutely aware that their fees negatively impact performance, albeit minimally. As a result they are reluctant to increase the retainer portion of their pay. However the additional meetings, many with additional fees attached, caused total compensation to rise. Indeed in 2001 the retainer made up 75% of total compensation; it now only constitutes 65%. In addition the number of meetings has caused some boards to more tightly define a "compensated" board meeting.


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