Choosing the best compensation program: fee or non-fee? It's a quandary many corporate decision-makers encounter when choosing cash managers. A noted cash manager--whose firm offers both types of services--provides some insights.

• Author: Saperstein, Richard
• Position: Cash Management

Corporate America is being subjected to increasing governmental as well as public scrutiny, and the word "accountability" is being redefined daily in board-rooms across the landscape.

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Some believe that the current climate is rooted in the savings and loan crisis of the early 1990s and the ensuing outcry for regulatory reforms. Whatever the cause, demands for greater oversight and stricter account-ability have impacted virtually every area of the corporate ledger, including cash management.

In December 1993, the Financial Accounting Standards Board (FASB) implemented a series of mandatory guidelines, all of which were designed to impose new responsibilities on corporations and the accounting firms that audit their books. Among these guidelines is FASB No. 115, Accounting for Certain Investments in Debt and Equity Securities. This guideline prompted this author to introduce an alternative to the then-traditional fee- or asset-based cash management compensation programs--a non-fee, or transaction-based compensation model. In due course, other corporate cash managers also elected to offer non-fee compensation programs.

With the advent of the non-fee alternative, CFOs outsourcing cash management were charged with determining which type of compensation program was more appropriate. Because of the complexities involved, these executives often found that process especially challenging and, as a consequence, many elected to establish relationships with both fee- and non-fee-based money managers. For a number of years, this strategy appeared to be a reasonable solution.

Then, in 2002, Congress enacted The Sarbanes-Oxley Act--legislation that provided for the creation of the Public Company Accounting Over-sight Board (PCAOB) to regulate and monitor the manner in which accounting firms throughout the U.S. conduct and report corporate audits.

As a result of this legislation, increasing numbers of CFOs and other financial executives are now carefully documenting the rationale behind the numerous decisions they make on behalf of the company and its stockholders. Among these decisions are those relating to outsourcing cash management and the process by which money managers are selected and compensated. Because the practice of outsourcing cash management is being subjected to closer examination, those responsible must perform significant due diligence before deciding whether to establish a relationship with a fee-based manager or non-fee-based manager.

Although there are exceptions, Bear Stearns has found that the decision as to which compensation program is more appropriate is generally driven by a company's accounting requirements and overall investment objectives. The following addresses the criteria for defining those objectives and for developing an informed approach to addressing cash management considerations.

Fee-Based Programs

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