Fund companies have a big secret: Size of top managers’ paychecks

“It’s an absolute black hole,” says Roy Weitz, editor of the Tarzana, Calif.-based Fund- Alarm.com newsletter, speaking of fund managers’ compensation. Fund companies aren’t required to disclose manager pay.

But if the Securities and Exchange Commission has its way, that might change. The SEC is looking into whether such information will benefit shareholders.

Among other things, the SEC wants to know what the pay incentives are for managers and how much they have invested in the funds they run.

Proponents of such a plan say investors need to know what their managers make in order to know if it’s money well spent. The fund industry, meanwhile, maintains that a competitive edge could be sacrificed if firms know what other firms pay.

“It’s long been accepted that this is important information for a stockholder to know. There’s no reason why it’s not important for a fund shareholder to know,” says Russel Kinnel, director of mutual fund research at Morningstar Inc. in Chicago.

Fund managers have a much greater impact on the performance of a fund than a CEO has on the performance of a stock, he argues.

While there is little information about the compensation of individual star analysts, there are some estimates.

A study by the Association for Investment Management and Research of Charlottesville, Va., and executive search firm Russell Reynolds Associates Inc. of New York indicates that the average domestic stock manager makes $325,000 a year, while bond managers are paid an average of $260,000. Pay for the top 10% of managers averages $1.1 million.

Golden handcuffs

Recruiters such as John Demery of Buyside Search Inc. in Santa Monica, Calif., say that the range for experienced managers runs between $800,000 and $3 million once salary, bonus and options are factored in.

Those who steward large funds at big firms are obviously in the upper echelon of that range. Managers who beat their benchmark year after year also earn a lot.

Bonuses typically run 50% to 250% of salary. So-called golden-handcuff agreements can lock talent into multiyear contracts but can deliver a windfall of several years’ pay.

For the most part, “salaries are almost universal between firms,” Mr. Demery says. “If you’re producing the numbers, you get paid more.”

Fund managers’ pay has followed the fortunes of the stock market in the last year. Pay is down 25.5% since 2001, according to the AIMR study, while the average domestic stock fund has fallen the same amount during that time. The reverse was true in the late 1990s, when both compensation and indexes inched up.

But Mr. Weitz contends that managers still aren’t feeling the pain, at least not the way shareholders are. “The base incentive fee is set too high,” he argues. “It almost doesn’t matter what the bonus is, so the performance is gravy.”

To be sure, some managers are making a killing. Bill Gross, the bond king at Pacific Investment Management Co. in Newport Beach, Calif., pockets about $40 million a year in a deal he got from German insurer Allianz AG when the firm was bought out in 2000.

Mario Gabelli took home $37.7 million in 2002, down 20% from the $47.1 million he made the previous year. Along with managing funds, Mr. Gabelli is also the chief executive and chairman of his publicly held firm, Gabelli Asset Management Inc. in Rye, N.Y., and the highest-paid fund executive.

Meanwhile, the highflying crew at Denver-based Janus Capital Group Inc., the large-cap-growth specialist, also reportedly makes the list of top-paid managers.

Though the funds have turned in lousy performance, compensation continues to be lavish. Analysts covering Janus stock are demanding to know what the firm pays its highly compensated employees.

Highfields Capital Management LP in Boston, the stock’s largest shareholder, with a 9% stake, has even called on management to lower the pay of its stock pickers. “If they thought that lowering compensation would lower Janus’ competitiveness, they wouldn’t have suggested it,” argues Mr. Weitz.

Despite Janus’ being a publicly held firm, compensation for its managers isn’t disclosed in public filings.

The best guess of what they make comes from Morningstar analyst Rachel Barnard. Because the firm spent $353 million on compensation in 2002, Ms. Barnard figures that the average fund manager at Janus makes $4 million, a figure skewed no doubt by former managing director of investments Helen Young Hayes, who was the biggest money draw.

There’s one exception to these tight-lipped policies on compensation disclosure. At Bridgeway Fund Inc. in Houston, founder John Montgomery publishes his salary in the statement of additional information attached to the company’s annual report.

In 2001, Mr. Montgomery was paid just $282,701. He says he got a modest raise in 2002, which will be revealed in the annual report addendum later this summer.

Mr. Montgomery takes exception to the secrecy surrounding manager pay, based on corporate-governance issues. Such information is widely available for public companies.

“When I look at proxy of a company I am investing in, I want to be sure that the executive is not capturing an outsized portion of the wealth of the corporation,” he says.

Mr. Montgomery says he started disclosing his salary a few years ago, after a shareholder asked for the information. Mr. Montgomery’s Bridgeway Aggressive Investors fund lost only 18% in 2002, beating the Standard & Poor’s 500 stock index by 4 percentage points and earning the firm 0.5% of assets in performance fees.

Related Topics: Compensation