Director Pay Jumps 24% in Past Two Years ICI Survey
Director compensation rose 24% in the last two years, but not as steeply as it did in the aftermath of the improper-trading scandal, according to the Investment Company Institute’s widely read survey on director pay and practices.
The median total compensation for independent directors increased from $71,125 to $88,000 between 2004 and 2006, according to the ICI survey.
By comparison, median total compensation for directors increased 37% between 2002 and 2004 (from $51,875 to $71,125), during which time a raft of new SEC regulations translated into greater oversight by fund boards, along with more meetings and longer hours.
“The bottom line is it’s not that surprising to see the compensation continuing to trend upward but to decelerate,” says John Ford, a partner at Morgan Lewis. Indeed, he says, there may be some effort to lessen directors’ workloads after duties were piled on to boards during the fallout of the market-timing and improper-trading scandal.
The ICI survey encompasses 181 complexes with information on 1,464 independent directors, which represents 67% of the independent directors that are tracked in the trade group’s database. (The survey was conducted in conjunction with the Independent Directors Council and Mercer Human Resource Consulting.)
Directors appear to be increasing their base salary as a percentage of total pay, says Meyrick Payne, senior partner at Management Practice, an industry consulting firm that also studies director compensation.
The median base fee for all directors surveyed represented about 57% of their total compensation — $50,000 of $88,000. And directors overseeing funds at the largest complexes, with a median total compensation of $198,000, have a median base pay of $114,000, which is also 57% of their total. (See graphic below for the median compensation for directors in each asset-under-management category.)
The difference between the retainer and total pay is made up of meeting fees— both in-person and telephonic — and additional retainers for various positions, including for independent chairmen and the chairs of board committees.
The reason for the increased retainers, says Payne, is that “[T]he directors’ job is an all-day, every day job as opposed to a job where you only have to pay attention four times a year.”
Morgan Lewis’s Ford says he knows of one board that five years ago used to hold four one-day meetings. Now that board has four two-day meetings and at least two special meetings a year.
The continuing increase in compensation for fund directors is also due in part to greater difficulties in attracting new directors, spurred by the tougher regulatory climate of recent years, say industry and compensation experts.
The Sarbanes-Oxley Act of 2002 and new SEC regulations have driven up directors' and officers' insurance across the board. And still, even with insurance, some individuals are very concerned about liability and may hesitate to join boards.
Furthermore, Institutional Shareholder Services, the powerhouse proxy advisory firm, will recommend voting against directors if it believes those individuals are serving on too many boards. That has made directors much more selective about additional directorships that they accept on both corporate and fund boards.
As a result, directors have become more scientific in setting compensation in recent years, with an eye toward attracting top-notch candidates to the board, say experts.
“We’re seeing more thought go into the process [of determining compensation] than before,” says Paul Dorf, managing director at Compensation Resources, Inc., a consulting firm.
Boards increasingly seek candidates with specific expertise in subjects such as derivatives, compliance and auditing, says Payne. But those specialized skills don’t come cheap, he says.
Directors’ interest in getting compensation right is reflected in the frequency with which respondents to the ICI survey assess their pay: About 66% said they review director compensation annually; about 15% review it every two years; and 17% said they use irregular time intervals but basically review the issue “as needed.”
The results of the ICI survey play a big role in directors’ comp reviews: About 96% of the survey participants said they consider the ICI/IDC study; 60% use publicly available information; 48% use commercially available information; 64% use board self-assessments; and 18% use other information, which includes relying on the experience of board members and colleagues.
With almost all fund directors relying on the ICI compensation data, there is some possibility of a “ratcheting effect” with pay, says Dorf. In other words, when directors review their pay packages this year, they will use the survey results and will probably give themselves a raise that’s partly based on the increases the ICI reported.
However, the total compensation for directors is a drop in the bucket of overall fund costs. Payne also notes the enormous power that mutual fund directors — a relatively small group in comparison to corporate directors — hold as fiduciaries for about $11.5 trillion in mutual fund assets.
“If a director at Fidelity is making $400,000 a year and he’s able to bring down fees by half a basis point, then he’s justified his salary many times over,” says Mercer Bullard, founder of Fund Democracy and a professor at the University of Mississippi.
