Management Practice Inc. (MPI) has just completed its 24th annual “Survey of Mutual Fund Director/Trustee Compensation and Governance Practices,” with data covering 1,982 directors from 410 fund boards. Full reports and specific board compensation comparisons are available from MPI.
The average pay increase from 2015 to 2016 (for equivalent directors) was 5.2%, down from 5.9%, 7.5% and 7.2% over the previous three years. This pattern of increases above 5% comes after several years of increases closer to 3% in the years following the financial crisis. The recent declining trend may indicate a reversion to the mean. Assets under management remain flat at around $16 trillion, which may also be slowing the pace of pay growth.
Notable again this year were the differences in increases depending on the level of assets. Last year saw above-average increases for many medium-sized boards (those overseeing $10 billion to $50 billion in AUM), as they found themselves facing many of the challenges of those overseeing larger fund groups, compelling them to increase pay to be able to attract qualified board candidates.
This year, the largest boards (overseeing $100 billion) saw slightly above-average increases, at 7.1%. However, as is always the case, the increase does not solely reflect pay increases that standing directors received; it is also reflective of significant ongoing changes in the structure of the industry. As an example, average pay levels are likely more than ever being impacted upward due to ongoing industry consolidation and merger activity, which often combines two or more boards with lower pay into one board with higher pay (albeit fewer directors).
Using AUM categories as the sole metric when setting compensation can be problematic, as is presented in the table below. This displays the pay range for fund boards with between $3 billion and $10 billion in AUM for 2013, 2014, 2015, and 2016:
Range of Trustee Compensation for Boards Overseeing $3 billion to $10 billion in AUM (in Percentile)
The wide 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 average mandatory retirement age rose significantly in 2016. 73% of participating boards have a mandatory retirement policy, with 75 now being the most commonly reported retirement age (59%, up from 37%) after remaining at 72 for many years. 10% have retirement ages above 75. This is reflected in the median and average director age, which rose to 67 and 68 respectively. “Director Emeritus” plans also continue to draw interest but do not appear to be widely used. The study found that approximately 20% of all current and 22% of new fund directors in 2016 were female, and 39% are retired from their primary profession.
The survey found that approximately 85% of all fund directors are classified as independent, with 66% of boards headed by an independent chairman, and an additional 23% 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, with a reported average of approximately $42,600.
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 (68%) 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 meeting fees only.
The relative cost of fund governance remains small relative to the total costs of running a fund. Total U.S. fund board compensation per $1 million in AUM amounted to just $17.98; a fraction 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 cost less to shareholders based on the asset levels overseen. For example, compensation per $1 million in AUM ranged from a median of $21.30 for groups with $1 billion or less in assets to $1.81 for groups with more than $100 billion in assets.