EDITORIAL: LEVEL WITH US ON PAY OF PORTFOLIO MANAGERS

The Securities and Exchange Commission demands that the compensation of CEOs and other top executives of publicly held corporations be disclosed annually. So why doesn’t it require mutual fund companies to disclose similar information on their portfolio managers?

The SEC should. Here’s why:

Shareholders of public companies get a chance each year to determine if executive compensation is justified or excessive, if it aligns the interests of top management with the long-term interests of the shareholders. If the shareholders do not believe the compensation is appropriate, they can take action, either by voting against the compensation committee recommendation or by selling their stock.

Unfortunately, mutual fund shareholders do not have the same information about the key executives running their funds — the portfolio managers, who can do as much or more to affect a shareholder’s economic well-being as the chief executive of any major public corporation.

Investors have no way of knowing if the compensation paid to those portfolio managers is just or lavish or if the compensation aligns the interests of the portfolio managers with their interests or not.

Who can determine if the compensation of each portfolio manager is based on the assets of the fund he or she manages, or the growth in the assets of the fund, or the annual performance of the fund, or its Morningstar rating, or a share of the parent company’s profits, or all of the above?

If performance is included in the calculation, is it short-term or long-term? Is it risk-adjusted? Is it measured against peer fund performance? A style index? A broad market index? If growth of assets is included, is it one-year growth? Multiyear growth?

Any method of compensation, other than straight fixed salary based on industrywide comparisons, can affect decision-making — for better or worse.

Relying on short-term performance is going to lead to short-term decision making, particularly toward the end of the year. Growth of assets as a measure might lead the portfolio manager to undertake too many marketing tasks — such as television appearances that build the fund’s image and raise his or her profile. These can distract the manager from the day-to-day task of researching stocks and making buy-or-sell decisions.

Besides, the shareholders have a simple right to know how much their portfolio managers are being paid. The shareholders, after all, are paying those salaries through their management fees. They have a right to determine if they are getting what they are paying for. Right now, they know only what they are getting in terms of performance, not what they are paying. They have no way of determining if they are overpaying or underpaying their portfolio manager.

A mutual fund is an investment company. If the investors are really shareholders, they deserve the same information as other corporate shareholders receive. Anything less makes a mockery of their status.