CCO Compensation Increases 9% But Still Varies Widely - May 2008 Print E-mail
Written by Jay Keeshan   

MPI has recently completed its third annual survey of Chief Compliance Officer Compensation and Organizational Practices. This Bulletin is a summary of the findings and is based on the submissions of 64 fund families following 46 which reported last year.

We analyzed the data by plotting the total compensation against assets under management. We found that CCO compensation increased as size increases but that economies of scale exist (i.e. a CCO is paid more for the first $1 billion of assets than the second $ billion and so on). We found that the highest paid CCOs approach $1 million per year and very few are paid less than $150,000. When we compared the same CCOs year over year we found an average pay increase of 9%.

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The total compensation for complexes with up to $10 billion in assets averages about $270,000 which might include a base of $180,000 and a bonus of about $90,000. For complexes with between $10 and $50 billion the total compensation averages about $310,000 which might include a base of $200,000 and an expected bonus of $110,000. For a complex with over $50 billion the total CCO compensation averages about $630,000 which might include a base of $230,000 and a discretionary bonus of $400,000. CCOs at the largest complexes stand apart because compensation is greatly dependent on the competitive market in which the CCO is based.

The bonus, which is almost always based on how well the CCO completes the pre-agreed compliance plan, represents a larger portion of compensation at larger fund families. There was a firm expectation among CCOs that the bonus would be paid. But the deferral has the practical effect of giving the board — and the management company where the CCO has advisor responsibilities — discretion to ensure that the annual compliance plan is achieved.

An important finding of our survey was that while CCOs often participate in the advisor’s 401(k) plan, they do not typically qualify for the advisor’s long term capital accumulation plan. These plans are usually based on restricted share grants or qualified stock options, and are worth 20% to 30% of total compensation for an executive of the typical CCO’s salary grade. As a result the CCO’s base compensation is typically set 20% to 30% above that of his or her grade’s salary range to make up for the loss of a capital accumulation plan. This discrepancy sometimes can cause tension with executives of the management company and sometimes leads to some misunderstanding with the fund board which is responsible for setting the CCO pay.

As the true costs and benefits of compliance become clearer over time, there is a trend toward splitting the cost of CCO compensation between the funds and the manager.  This year 59% reported being paid entirely by either the fund or the advisor, down from 74% last year. In 2007 we found that 54% of the CCO compensation was totally paid by the advisor but that percentage has now dropped to 48%. This reflects the emerging pattern of CCOs performing certain compliance functions for other parts of the advisor’s business. We also found that 74% of the reporting CCOs perform analytical functions directly for the fund board. Sometimes these include being involved in the 15(c) contract renewal process or in monitoring soft dollar expenditures.

We emphasize that these projections are very inexact. The range of CCO compensation for the reporting fund families was very wide and depended on many variables, such as geographic location, number of funds and portfolios, retail or institutional distribution, number of sub-advisors, and mix of insurance related products. We also found that many CCOs had been long term employees of the management company, or had had many years of experience in another fund company. As a result CCO compensation was often correlated with age and experience.

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Any individual CCO’s compensation must be evaluated in proportion to the effort, expertise and exposure of that particular complex. And of course CCO compensation, like for any other position, is the result of determining how best to attract, motivate and retain the requisite talent for the specific assignment.

 
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