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As Shareholders Gain, CEOs Do Even More So

April 12, 1998|TIM QUINSON | Tim Quinson is a mutual fund writer for Bloomberg News

Millions of Americans are benefiting from this 7-year-old bull market--and some mutual fund company executives are getting downright rich.

The stock of T. Rowe Price Associates Inc., for instance, jumped 46% last year. The fund manager's chairman, George Roche, received a 42% increase in salary and bonus for the year.

"In some cases, investors would have been better off buying a 'call' if they could on the CEO's earnings than investing in the company's funds," said executive-compensation expert Graef Crystal, editor of the Crystal Report, a newsletter on executive pay.

Last year, T. Rowe Price's best-performing fund was Financial Services, which rose 41.4%, according to Bloomberg Fund Performance.

The executive-pay/fund-performance picture is similar at other fund companies.

Janus Capital Corp.'s chief executive, Thomas Bailey, earned 60% more in salary and bonus last year. The best-performing Janus fund last year was Special Situations, up 44.7%.

Putnam Investments' Lawrence Lasser was paid 24% more in 1997, a year in which only eight of Putnam's 54 funds generated returns of that amount or more, according to the research group Morningstar Inc.

Of course, fund returns depend on financial markets' overall performance and the stock- or bond-picking skills of individual fund managers, whereas fund CEOs' pay is less likely to depend on the markets' trend than on how well their companies perform relative to the industry.

Industry officials said that the pay fund company chief executives get is commensurate with the gain in profits and revenue at their firms and that the formulas are consistent with past years.

"Generally, compensation is tied to the earnings of the management company," said Steve Norwitz, vice president at T. Rowe Price.

Baltimore-based T. Rowe Price last year paid Roche almost $2.53 million in a period when its own net income rose to $144.4 million. That followed 1996, when Roche received a 13% pay increase and the company's earnings rose 31% to $98.5 million.

New England Investment Cos.' chief executive, Peter Voss, was paid 37% more in salary and bonus last year, for a total of almost $2.5 million, as the money management company's earnings rose 36% to $95.7 million. Voss received a 25% pay raise in 1996, when the company's earnings increased by the same amount.

Putnam's Lasser is among the industry's best-paid executives, according to regulatory filings. Lasser earned almost $12.9 million in salary and bonus last year. Putnam accounted for about 62% of parent Marsh & McLennan Cos.' almost $745 million of operating income last year.

In addition to his bonus, Lasser also received the right to buy stock options that could be worth an additional $39 million, according to the company's proxy statement.

Roche, Bailey, Voss and other fund executives also own chunks of stock in the companies they manage. Roche, for instance, controlled about 1.5 million shares of T. Rowe Price at the end of last year. Bailey, who earned about $1.57 million in salary and bonus last year, owns 12% of Janus, a stake that's worth more than $250 million based on current market values, investment bankers say.

It's impossible to determine how much all the industry's top executives earn because so many of the companies are closely held, including the two biggest, Fidelity Investments and Vanguard Group.

It's even tougher to know for sure how much money leading fund managers earn. Some make more than the chief executives, said Lawrence Lieberman, head of Orion Group Inc., an executive search firm in Princeton, N.J.

Reports filed with the Securities and Exchange Commission don't disclose portfolio manager salaries unless the managers also are corporate officers.

Fund managers who oversee billions of dollars of assets regularly earn well over $1 million a year, Lieberman said.

Managers' compensation is included as part of a fund's management fees, and investors can look in annual reports and prospectuses to see what it is, said Jeffrey Molitor, director of portfolio review at Vanguard Group.

"The bottom line is you want to give investors information that will make it easier for them to understand the nature and risks of the funds," Molitor said. "Costs are part of the equation, but what the individual manager earns isn't necessarily relevant."

CEOs' compensation isn't exorbitant if you consider it's based on how well fund companies are doing and that they're getting help from the long-running market rally, said Franklin Morton, research director of Ariel Capital Management Inc., which owns 450,000 shares of T. Rowe Price.

"I don't mind paying executives a lot of money when things are going well, as long as their compensation package is structured in such a way that it declines in leaner times," Morton said.

To that, today's fat and happy mutual fund investors probably would say, "Amen."


Tim Quinson is a mutual fund writer for Bloomberg News.

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