More Meetings, More Pay:Fund Directorsí Compensation Increases 13 % as Workload Grows - April 2005
Written by C. Meyrick Payne   

For the second year in a row, the increase in fund director compensation was
driven more by the number of meetings than by the retainer. After a robust increase of
8% in the first half of 2004, the pace of pay raises for independent mutual fund
trustees/directors slackened slightly in the second half but still wound up the year with an
annual increase of approximately 13%. This second full year of Sarbanes-Oxley impact,
along with continued fund regulatory reform, saw a continued increase in the
responsibilities of evermore influential fund directors, resulting in a two-year (’03-’04)
compensation gain of 27%.
Directors are finding the job requires more and more time to stay on top of
governance issues. The increase in total compensation is 72% attributable to additional
meetings and more paid committee work. Only 28% of the increase is attributable to
increased board retainer. The median number of board meetings has risen from just under
5 in 2003 to nearly 6 in 2004 reflecting the increased complexity and time consuming
nature of board work. The typical board meeting lasts 6 or more hours, with many board
meetings spanning 2 days.

“This compensation increase is a manifestation of the evermore important role of
independent fund directors in reassuring America’s investors that mutual funds are a safe
and sensible place to save,” says C. Meyrick Payne of Management Practice Inc.
The Chairman and the head of the Audit Committee have seen greatly increased
demands on their time, particularly since the appointment of a Chief Compliance Officer
(CCO) in October 2004. Some Chairmen report that their level of interaction with the
CCO is on a nearly daily basis and that their overall time commitment, in some large
complexes, exceeds 600 hours per year. Indeed the time requirement for the Independent
Chairman is sometimes so great that some large boards feel it necessary to pay a
premium which compensates for the opportunity cost of serving.
The Independent Chairman or Lead Director is likely to receive a compensation
premium of between 25% and 50% of the board retainer to reflect increased effort,
expertise and exposure. Throughout 2004 the premium rose and seems likely to reach
between 50% and 100% of the board retainer as the date requiring the appointment of an
Independent Chairman, January 1, 2006, draws near.

Other committees are also finding themselves with heavier workloads and
increased pay. 72% of boards pay additional compensation for committee service, up
from 68% last year as the importance and frequency of meetings increased. While
holding committee meetings on the same day as the general board meeting is still the
norm, an increasing number of committees are now required to meet on separate days.
Compensation for committee service varies depending on the specific committee.
Audit and Contract Committees receive the highest premium. The average
compensation paid to a director for sitting on any one committee was $6,990, up from
$6,750 last year.
Increasing consolidation in the
fund industry has slightly decreased the
number of portfolios overseen by the
typical mutual fund director.
Simultaneously, his or her compensation
and assets governed have increased, as
shown in the following table.
Increase/
(Decrease)
Small
Complexes
Large
Complexes
Compensation 14.0% 12.8%
Portfolios
Governed
-1.1% -2.4%
Assets
Governed
18.2% 9.5%
This consolidation has led to fewer fund directors, including those of the 50
largest fund complexes surveyed, where 306 directors oversee 75% of all fund assets.
The influence of one of these fund directors, as measured by market capitalization, is
over 20 times that of a New York Stock Exchange member corporate director. In these
largest complexes, each fund director governs, on average, over $20 billion in assets. In
comparison, the average market capitalization overseen by one of the 22,000 NYSE
member directors is under $1 billion.
While directors of the largest mutual fund complexes are paid the most, the cost
to shareholders is relatively insignificant at just $1.93 per $1 million assets governed—a
remarkably cost-effective safeguard when compared to the cost of an electronic
monitoring system for a $1 million house.
Also worth noting is the concurrent increase in the director salaries at the U.S.’s
top 200 public companies, which are also seeing heightening governance demands. In a
recent study by Pearl Meyer and Partners, a compensation consulting firm, the cash
portion of the average directors’ pay increased 21% in 2004. Corporate directors’
compensation is almost always made up of a cash portion and an equity portion, either in
the form of a stock grant or option.