Dear Board Doc: How Do We Set our CCO Compensation Competitively?
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Q: We have heard rumors that our CCO, who performs work both for the funds and the adviser, is being approached by other fund complexes. We would like to retain our CCO and are thinking about ways to pay them more competitively. Can you recommend how our board can think about CCO compensation in view of retention in this competitive labor market?
A: Fund boards have regulatory authority to hire, fire, and approve the compensation of the CCO but the adviser also plays a role in CCO compensation. According to the Forum’s white paper on the Board-CCO relationship “even though the board often lacks an unfettered ability to set the compensation for the CCO, the board does retain ultimate control over the approval of that compensation. In considering the CCO’s compensation, the board has an interest in establishing a compensation structure that is sufficient to attract and retain a highly qualified CCO.” Companies are employing a variety of strategies to recruit and retain employees, including opportunities for remote or hybrid work and creative benefits packages. According to the Society for Human Resource Management, salary is important factor but employee job satisfaction and engagement factors are key ingredients of employee retention programs. Therefore, as the board and adviser consider compensation, the focus does not have to solely be on the dollar amount of the compensation.
With respect to the dollar amount of the compensation, reports and data from trade associations and third-party consultants can be helpful for benchmarking CCO compensation. CCO annual salary has been on an upward trend and can range from $100,000 to $700,000 based on experience and other factors including: geographic location, number of funds and portfolios, retail or institutional distribution, number of sub-advisers, and mix of insurance related products, according to Management Practice Inc. MPI’s 2020 survey of CCOs and fund complexes noted that the vast majority (93%) of CCOs receive a bonus as part of their total compensation. “Bonuses and other compensation, such as stock options/grants and retirement contributions, represent an increasing proportion of total pay as the size of the fund complex grows.” The board plays an important role in setting the CCO’s salary and bonus along with fund management. According to MPI, in 2020 the majority of CCOs reported that their bonus is influenced by management (89%) as well as the board (66%).
Boards can face challenges in setting CCO pay, however, given the different structures of the CCO position. As you mentioned, the CCO performs work on behalf of the funds and the adviser. Thus, the board might need to consider CCO compensation in light of the adviser’s pay scale and the relationship between the CCO and the adviser. If the CCO is compensated at a lower rate than colleagues, retention may become an issue. However, compensating the CCO more than peers within the fund complex could negatively affect the CCO’s relationships with other adviser personnel. This is an opportunity for the board to work with the adviser with the shared goal of retaining the CCO.
There also is an opportunity to communicate with the CCO about their job satisfaction. In the SHRM’s report Employee Job Satisfaction and Engagement: The Doors of Opportunity are Open research report, employees identified five factors as the leading contributors to job satisfaction: (i) respectful treatment of all employees at all levels. (ii) Compensation/pay (iii) Trust between employees and senior management. (iv) Job security. and (v) Opportunities to use their skills and abilities at work. In your conversations with the CCO you may wish to find out how the CCO thinks about their current role and how some creative moves by the adviser and board could make staying more attractive than leaving.
Resources:
MFDF Webinar Archive - Mutual Fund CCO Compensation: The MPI Annual Survey
The Board-CCO Relationship, MFDF
Managing for Employee Retention, Society for Human Resource Management