Mutual Fund Director Compensation in 2014 - May 2015
Written by Jay Keeshan   

 

 

Management Practice Inc. (MPI) has just completed its 22nd annual “Survey of Mutual Fund Director/Trustee Compensation and Governance Practices,” with data covering 1,988 directors from 433 fund boards. Full reports and specific board compensation comparisons are available from MPI.

 

 

 


Management Practice Inc. (MPI) has just completed its 22nd annual “Survey of Mutual Fund Director/Trustee Compensation and Governance Practices,” with data covering 1,988 directors from 433 fund boards. Full reports and specific board compensation comparisons are available from MPI.

 

For a second year in a row fund boards saw increases above 7%.  In 2013, the average increase year-over-year (for equivalent directors) was 7.2%; 2014 came in slightly higher at 7.5%.  This comes after several years of increases closer to 3% in the years following the financial crisis.  Steady increases in fund industry assets, now breaching the $16 trillion mark, were probably a major factor.

 

Notable within the data was the difference in increases depending on the level of assets.  Whereas higher increases are typically seen at larger and more complicated fund boards, 2014 saw smaller boards taking the larger increases—very likely playing “catch up”—after making fewer adjustments following the crisis. 

 

A quick split of the data showed boards overseeing more than $50 billion increased pay on average at about 5%, while smaller boards took increases closer to 11%.  The low AUM at smaller boards, and the potential impact of any increase in expenses, caused many directors to hold their compensation flat until the markets recovered. 

 

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 expanding 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 $3 billion and $10 billion in AUM for 2013 and 2014:

 

 

Range of Trustee Compensation for Boards Overseeing

$3 billion to $10 billion in AUM (in Percentile)

 

10th

25th

50th (median)

75th

90th

2013

$32,000

$47,750

$67,500

$85,000

$109,200

2014

$32,125

$50,000

$73,500

$95,500

$166,163

 

 

The widening range of pay from the 10th to the 90th percentile in this relatively small grouping demonstrates that it can be difficult to properly set pay using just one or even two metrics.


The survey found that approximately 86% of all fund directors are classified as independent, with 68% of boards headed by an independent chairman and an additional 20% 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.  More boards now report having a specific set of criteria for recruiting new directors, and committee chairs are often hired specifically for their particular background.  They are also receiving a fee more often and at increasing levels.  While the range of these fees varies widely depending on the particular duties, they typically are in the $10,000 to $30,000 range. 

 

Two-thirds (67%) of US fund boards are 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 (28%) are paid by retainer only, with relatively 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 U.S. fund board compensation per $1 million in AUM amounted to just $16.48, 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 U.S. taxpayers, but rather by those who directly benefit from its protection.

             

Trustees of larger complexes cost less relative to the asset levels overseen.  For example, compensation per $1 million in AUM ranged from a median of $37.80 for groups with $1 billion or less in assets to $1.60 for groups with more than $96 billion in assets.

 

Our data finds that approximately 19% of all standing fund directors are female, and 38% 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, 55% 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 activity for fund directors, we have noted an increase in the independent director reserve in the D&O insurance policy for many boards.

 

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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(203) 973-0535 or email This e-mail address is being protected from spam bots, you need JavaScript enabled to view it .