Mutual Fund Director Compensation in 2013
Written by Jay Keeshan and Meyrick Payne   
Management Practice Inc. (MPI) has just completed its 21st annual “Survey of Mutual Fund Director/Trustee Compensation and Governance Practices”, with data covering 1,960 directors from 375 fund families. Full reports and specific board compensation comparisons are available from MPI.
After three years of annual increases closer to 3%,   year-over-year (equivalent director) compensation increased an average of 7.2% in 2013.  This higher increase is likely due to several factors; most notably among them a second year of significant gains in industry assets.  2012 saw assets increase by 13%, followed by a 15% increase in 2013, to a total of just over $15 trillion.

Another likely factor was boards “catching up” after not revising compensation for several years.  This is a typical pattern for boards but was exaggerated by the financial crisis.  Now that industry assets have exceeded pre-crisis levels, many boards may feel more comfortable taking an increase.  
 
Directors at 30 of the largest fund families saw slightly higher increases at 7.5%.  A higher rate among these boards is typical, and is often due (in part) to a form of survivor bias: when two smaller boards merge, a larger group of lower paid directors becomes a smaller group of usually higher paid directors, which of course affects the average.  

Setting director compensation has become more difficult in recent years, particularly for some boards, as the use of AUM as a metric becomes less relevant in the face of a rapidly evolving industry.  Factors such as breadth of distribution channels, use of sub-advisors, and complexity of products and investment types have a greater impact on directors’ responsibilities and are being taken into consideration more often when selecting comparable peers.  

Using AUM as the sole metric can be problematic, as is displayed in the table below. This is the pay range for fund boards with between $1 billion and $7 billion in AUM from 2010 - 2013: 
 
Range of Trustee Compensation for Boards Overseeing
$1 billion to $7 billion in AUM (in Percentile)
 
 

 

10th

25th

50th (median)

75th

90th

2010

$20,000

$37,000

$48,875

$63,719

$81,250

2011

$19,032

$35,000

$50,735

$71,000

$92,400

2012

$12,804

$24,000

$46,000

$64,638

$91,800

2013

$19,125

$34,350

$54,700

$76,000

$99,600 

 
For this grouping, the median compensation actually decreased in 2012 even while industry pay was up 3.4% overall.  This is possibly the result of more highly paid directors moving out of the grouping and lower paid directors joining it as their assets increased during the year, which creates a net downward effect on the compensation numbers.  Furthermore, the wide range of pay from the 10th to the 90th percentile in any given grouping demonstrates that it can be difficult to properly set pay using just one or even two metrics. 
 
The survey found that approximately 87% of all fund directors are classified as independent, with 70% of boards headed by an independent chairman and an additional 15% headed by a lead independent director.  The vast majority of these chairmen (along with many lead independent directors) receive additional fees of anywhere from $10,000 to $200,000 or higher.  
 
Boards continue to adjust their committee structures as the industry and their fund complex evolves. Committee chairs, often hired specifically for a particular background, are receiving a fee more often and at increasing levels.  More boards now report having a specific set of criteria for recruiting new directors.

Just over two-thirds (70%) of US fund boards continue to be paid with a combination of retainer and meeting fees.  While a level of total annual compensation is typically set as a target, this structure allows some flexibility during extenuating circumstances.  The majority of the rest (26%) are paid by retainer only, which just a few boards paying only meeting fees.  

The relative cost of fund governance remains a mere fraction of the total costs of running a fund.  Total US fund board compensation per $1 million in AUM amounted to just $17.02, compared to the $10,000 in management fees and other expenses a typical mutual fund might incur (assuming a 1% expense ratio).  Independent directors provide a highly efficient system of oversight that is paid not by US taxpayers, but rather by those who directly benefit from its protection.

The survey notes that the mutual fund industry is highly concentrated, with the top 25 complexes controlling about 68% of all fund assets. These 25 complexes have about 287 directors (including cluster boards). On average, each of these large complex directors oversees approximately $52 billion worth of assets, a much wider span of oversight than even directors of NYSE companies. 

Our data finds that approximately 18% of all standing fund directors are female, and 35% are retired from their primary profession.  The median director age was 66, with the average at 65.

Retirement ages continue to trend upward.  73% of participating boards have a mandatory retirement policy, with the most frequently reported age at 72. However, fully half of boards have retirement ages above 72.  “Director Emeritus” plans also continue to draw interest but do not appear to be widely used.

Finally, in an environment of increasing legal actions against fund directors, we have noted an increase in the director “carve out” in the D&O insurance policy for many boards. 

******

Management Practice Inc. is a specialized consulting firm based in Stamford, Connecticut, and provides governance, economic, and business advice to mutual fund boards. More information regarding this report is available at www.MFGovern.com or from C. Meyrick Payne or Jay Keeshan at (203) 973-0535 or email This e-mail address is being protected from spam bots, you need JavaScript enabled to view it