The high cost of retaining key mutual fund executives and concerns about lawsuits have produced what may become a common ingredient in mutual fund company acquisitions -

a letter saying that the multimillion dollar pay used to keep top executives is fair.

Pimco Advisors LP of Newport Beach, Calif. recently hired a highly regarded compensation consulting firm to issue an opinion on the fairness of the compensation for top Pimco executives as part of Allianz AG's acquisition of 70 percent of Pimco. McLagan Partners of Stamford, Conn. issued a letter dated Oct. 29 as part of the Pimco acquisition, saying special pay arrangements designed to prevent top Pimco executives from leaving the firm after the sale were reasonable in light of market practices and Pimco's existing compensation system.

Pimco's parent company, Pimco Advisor Holdings L.P. of Newport Beach, Calif., included the McLagan opinion letter with the proxy statement Pimco Advisor plans to send to investors as part of the proposed sale to Allianz of Munich, Germany. Pimco Advisor Holdings filed the preliminary proxy statement with the SEC on Dec. 21. Pimco Advisors Holdings investors are scheduled to vote on the terms of the proposed sale at a meeting March 24.

The McLagan letter does not identify the amount of compensation Allianz plans to pay as part of the deal. It also does not identify key executives by name.

A separate Pimco SEC filing Dec. 21, however, said Allianz plans to pay eight top Pimco executives a total of $78.2 million a year in cash for five years in "retention awards" to keep the executives from leaving Pimco. The retention compensation does not include other payments the executives will receive as part of the sale and for their continued employment, according to the SEC filings.

William Gross, Pimco's star fixed-income fund manager, is to receive $34.8 million in cash annually as part of the retention awards, according to the SEC filing. The interest in the retention payments which Gross and the other top executives have will vest 20 percent each year, according to the filing. The executives also will sign non-compete agreements as part of the deal.

Public companies commonly obtain so-called "fairness letters" from investment banking firms on the reasonableness of the proposed sales price in an acquisition. And businesses routinely hire compensation consultants to evaluate the competitiveness of their own salary structures and recommend changes.

But, mutual fund lawyers, litigators and executive recruiters interviewed last week could not recall an instance when a company obtained a fairness opinion on executive compensation and made that opinion public as part of a sale.

The idea of a fairness letter for compensation for top executives makes sense in light of today's employment market for top mutual fund executives, said George Wilbanks, managing director of Russell Reynolds Associates of New York, an executive search firm. Mutual fund firms now routinely provide top executives with special pay arrangements which vest gradually in an effort to keep executives from leaving the firm, Wilbanks said. That compensation can run into the millions, he said. And, those arrangements are having their desired effect, as it has become difficult for fund companies to hire away top personnel from competitors, he said.

Keeping Pimco's top executives, particularly Gross, would seem to be key for Allianz. The Pimco Total Return Fund and similar separate accounts which Gross manages constituted 49.9 percent of Pimco's assets under management, according to an analysis in Pimco's SEC filings.

The McLagan opinion letter is standard in transactions such as the Allianz acquisition, said Mark Porterfield, a spokesperson for Pimco. He declined to comment further.

McLagan executives could not be reached for comment. The firm is well respected and highly sought after for evaluating compensation in the financial services industry, according to recruiters and industry lawyers.

Recruiters and lawyers, however, said they were surprised that a company would hire a consultant to issue a fairness letter on compensation and make such a letter public. The move may be an attempt to provide a defense for Pimco in litigation involving the sale, lawyers and recruiters said.

Investors filed five class action lawsuits against Pimco soon after the Oct. 31 announcement of the sale to Allianz. The suits alleged conflicts of interest on the part of Pimco and its executives in negotiating the sale of the firm, Pimco said in an SEC filing Nov. 15. The cases include allegations that top executives negotiated the sale for their own benefit rather than that of investors, according to Pimco's Nov. 15 filing. The McLagan letter looks like a defensive move that anticipated the possibility of class action litigation once the deal was announced, lawyers and recruiters said.

"It does sound like they are protecting themselves," said Joseph Preston, a financial services recruiter in Clinton, N.J.

Steven G. Schulman, a lawyer for Milberg Weiss Bershad Hynes & Lerach LLP of New York, one of the attorneys who is representing investors in the Pimco cases, declined to comment.

Steps such as the McLagan opinion letter may become more common in the coming year, according to some lawyers. The repeal of Glass-Steagall legislation and the passage of the year 2000 without serious computer trouble are expected to increase the rate of merger activity in the mutual fund industry this year, according to lawyers. Those transactions could spur mutual fund companies to pay millions to retain top executives, lawyers said. Hiring a compensation consultant to assess and issue an opinion letter may reduce the chance that plaintiffs will successfully challenge compensation, according to lawyers and executive recruiters.

"I think you'll see more of it," said Carl Frischling, a lawyer with Kramer Levin Naftalis & Frankel LLP of New York, of the practice of using a compensation consultant's opinion letter in sales.

The opinion letters may prove to be more form than substance, said Wayne Lewis-Hutchinson, director of merger and acquisition services for the Spectrem Group of San Francisco, a consulting and investment-banking firm. Compensation has become so high that courts and observers are likely to look at the pay itself rather than an opinion letter when judging whether special retention arrangements are fair, Lewis-Hutchinson said.

Whether compensation is fair "is going to depend on what the actual numbers are," he said.

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