Pimco Bond Manager Is Offered $200 Million to Stay With Company

Orange County bond guru William H. Gross will become one of the world’s highest-paid investment managers--earning about $40 million annually over the next five years--under a compensation package proposed in the pending takeover of Pimco Advisors Holdings by German insurer Allianz.

The $200-million payout--consisting of mostly cash and some stock over the next five years--is being offered to ensure that Gross, one of the world’s most respected bond managers, remains at the Newport Beach-based company after it is sold to Munich-based Allianz.

Such compensation would elevate Gross, a onetime professional blackjack player who was named Morningstar’s 1998 Fixed Income Manager of the Year, to the top echelon of investment professionals--a place typically reserved for Wall Street’s hottest stock pickers and mutual fund managers.

The pay also would make Gross the highest-paid executive in Orange County. By contrast, this year’s salary leader was Jerre L. Stead, chairman of Santa Ana-based Ingram Micro Inc., who took home $15.9 million, all of it from exercising stock options.

For someone who is not the chairman or chief executive, “$40 million in guaranteed compensation is just plain outside the box,” said Lou Harvey, president of Dalbar, a Boston-based research firm that tracks the financial services industry.

However, Gross’ salary is not unprecedented in the industry.

In 1998, for example, Mario J. Gabelli, chairman and chief investment officer of the Gabelli Funds based in Rye, N.Y., earned $42.4 million in total compensation, according to a recent filing with the Securities and Exchange Commission. The year before that, he earned $33.6 million.

And last year, Lawrence J. Lasser, president of Putnam Investments in Boston, earned more than $18 million, most of which came in the form of bonuses, according to filings with the Securities and Exchange Commission.

By contrast, however, the median compensation for bond fund managers this year is expected to be around $255,000, according to industry surveys.

“There probably aren’t that many people making this kind of money in terms of overall salary,” said Geoff Bobroff, a mutual fund industry consultant in East Greenwich, R.I. “But I would suggest that there aren’t that many Bill Grosses, either.”

Gross is arguably the best-known bond fund manager in the country. Notes Steve Savage, editor of the No-Load Fund Analyst newsletter in Orinda.: “We use Pimco because of Bill Gross.”

Though Gross manages several bond funds for Pimco, he is best known as the head of Pimco Total Return, the nation’s largest bond fund, with nearly $30 billion in assets.

Thus far this year, Total Return has pulled in $6.4 billion in net new money, according to the Boston-based research firm Financial Research Corp. To put that in perspective, that represents half of all the new money that the entire mutual fund industry attracted into its bond portfolios.

In addition, for every $1 of net new money invested in bond funds this year, 72 cents has gone to Pimco Advisors.

“Gross is the Peter Lynch of bonds,” said Savage, referring to the legendary former manager of the Fidelity Magellan stock fund.

According to the Chicago-based fund tracker Morningstar Inc., Pimco Total Return ranks as the third best-performing corporate bond fund over the past decade. At the same time, its fees are approximately 10% less than those of the typical taxable bond fund.

“One thing you have to bear in mind,” added Bobroff, “is that Pimco, unlike some other publicly traded asset management companies, was organized as a master limited partnership.”

As such, investors never bid up Pimco shares as they did other asset management stocks during the ‘90s bull market. That means Gross may not have benefited as much from stock market gains as other executives of publicly traded mutual fund companies and investment firms, Bobroff said.

Gross, 55, was traveling Thursday and unavailable for comment, his office said. Other Pimco officials declined to comment on the retention package. Representatives for Allianz could not be reached for comment.

The German insurance company is paying about $3.3 billion, or $38.75 a share, to acquire a majority stake in Pimco Advisors. The deal is expected to close early next year. Pimco shares closed Thursday at $37.88, down 13 cents, in New York Stock Exchange trading.

In exchange for the payout, Gross must sign a seven-year employment contract. If he leaves the company early, he forfeits the money, according to SEC filings.

The $40-million annual payment consists of $34.8 million in cash and about $5 million in restricted stock, according to the filing.

The compensation does not include the $26 million Gross will pocket by selling his stake in Pimco to Allianz.

Gross will also be entitled to additional payouts triggered by the termination of his old employment contracts.