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Directors' Pay Rose in 1999, Study Finds

Mutual fund directors' compensation, which has been criticized for being excessive, rose by 9.1 percent in 1999, according to a new study.

The median compensation for directors in fund complexes with more than $25 billion in assets under management was $75,000 last year, according to Management Practice of New York, a consulting firm that advises fund directors. Assets managed per director rose 7.8 percent in 1999, according to the firm.

The increase in compensation exceeded the growth in the number of funds that a director oversees, according to the survey. The number of funds that directors govern rose by 1.8 percent, according to the survey.

Management Practice calculated the increase in median compensation from average total compensation figures but the firm declined to disclose those figures.

Management Practice reported the results May 3. The survey covered director compensation practices at 345 mutual fund complexes that accounted for 1,803 directors, said Meyrick Payne, senior partner at Management Practice. Management Practice obtained the compensation data from SEC filings and directly from firms, Payne said.

The 1999 percentage increase in compensation was identical to the raise for directors that Management Practice reported for 1998. The median pay for directors for each fund they oversaw rose from $1,818 in 1998 to $1,909 in 1999, Management Practice reported.

Fund directors set their own pay. The compensation comes from the funds they govern.

The pay raise comes as fund directors face increased scrutiny from the SEC and potential increased legal liability for their actions, Payne said. Increased responsibility rather than increased volume of work has made fund directors' jobs tougher, according to the study.

"The amount of time spent generally worrying about issues between and among directors has gone up dramatically," Payne said.

Allegations of excessive director pay have been key to several, mostly unsuccessful lawsuits against mutual funds. The SEC also has increased its demands on directors, urging directors in recent months to pay closer attention to mutual fund advertising practices and to closely monitor fund management.

The Investment Company Institute in July also adopted proposals calling for fund boards to make changes in their practices to further insure board independence. Litigation, SEC scrutiny and the ICI recommendations all have increased the headaches associated with being a fund director, Payne said.

"People really are more concerned about taking these jobs," Payne said.

Les Ogg, general counsel for the American Express Funds of Minneapolis, declined to comment on the Management Practice survey but said that directors' work has expanded in recent years. Directors have had to spend more time working outside of regularly-scheduled board meetings to keep pace with changes in the mutual fund industry, he said.

"Whatever their compensation, people are earning their keep more," Ogg said.

Although the SEC has been pressuring fund directors to take steps to maintain their independence, the agency has not challenged the pay directors receive. In fact, Arthur Levitt, chairman of the SEC, has said he does not believe there is a correlation between the amount of a director's pay and the independence of the director from fund management. (MFMN 5/25/98)

Courts largely have agreed with that assessment. A U.S. District Court judge in Baltimore dismissed a case against T. Rowe Price Associates of Baltimore in March that was based in part on allegations that fund directors were so well paid that they lost their independence from T. Rowe Price. Directors' fees must be so high that they, "shock the conscience of a reasonable person" before a disgruntled shareholder can raise a question about director independence, the judge said. (MFMN 3/27/00)

There is a wide disparity in compensation for directors among fund complexes based on their size, according to the Management Practice study. Directors at complexes with less than $1 billion in assets under management had median compensation of $8,000. Directors at complexes with more than $1 billion but less than $5 billion in assets had $19,480 in compensation, according to the survey. Although the median for all directors rose from 1998 to 1999, the median actually declined for directors at complexes with more than $25 billion in assets under management. Median pay for this group in 1998 was $79,700 versus $75,000 last year. In 1997, it was $86,000. This may stem from the fact that funds that had previously been in the under $25 billion category grew to above $25 billion while director compensation was not adjusted according to the assets in complexes, Payne said.

Directors at bank-managed mutual funds were paid significantly less than other directors, according to a summary of the survey. The survey summary did not disclose specific compensation figures for bank directors. Payne declined to comment on the precise amount of the differences.

The survey also showed that the mutual fund industry has a long way to go if it wants the independent directors of each fund board to have their own lawyer. Only 50 percent of the fund boards have lawyers designated specifically as counsel to independent directors, according to the Management Practice survey. The SEC has proposed that if fund directors have lawyers, they should be independent of the fund adviser.