Performance-Based Compensation Seen As Nonstarter

Mutual fund directors are unlikely to follow in the footsteps of a new plan announced by Coca-Cola Co. where directors are not compensated unless the company hits its financial targets. While lawyers have heard fund boards discuss similar issues in the past, it isn't a likely structure because much of fund directors' duties are not performance-related.

"I'm not convinced that there is a very good reason to have mutual fund directors' compensation tied to whether the funds exceed or did not meet their benchmarks," said Mike Radmer, partner with Dorsey & Whitney. The concept keeps with the idea that the retail investor wants performance, but it would be very difficult, said Meyrick Payne, senior partner with Management Practice. "I don't think it would be a good idea, nor do I think it would happen because directors have responsibilities that exceed performance and you don't want them only worrying about performance," he said.

Directors still have responsibilities for risk and compliance, whether or not the fund has good performance. "I don't think you can measure a board of a fund in the same way you can measure a board of a company," said Roger Joseph, partner with Bingham McCutchen. "Clearly the board has responsibilities in the area of performance but I don't think they are directly accountable in the same way."

But a fund board could figure out what percentage of its duties and responsibilities relate to monitoring performance and then some fraction of its compensation might vary depending on how well the funds did, Radmer said. "I think a better way to have the directors' interests aligned with fund shareholders is have those directors hold a substantial amount of fund shares," he added.