Funds Still Reward Execs for Poor Performance

Few investors want to lavish rewards on corporate executives for a lousy performance. But if you own shares in a mutual fund, there's a good chance you are doing just that.

A study of the proxy voting records of 29 mutual fund families by the American Federation of State, County and Municipal Employees, the Corporate Library and the Shareowner Education Group indicates that between July 2005 and June 2006, fund managers backed management-sponsored proposals on executive compensation just over three-quarters, or 75.8%, of the time.

That represents a slight uptick from 75.6% during the year-earlier period.

"These mutual funds are failing to protect the assets of their clients," says Gerald W. McEntee, president of AFSCME. "CEOs should be paid for performance. Investors in these mutual funds should be outraged that their assets are being used to prop up undeserved CEO pay."

The year the first study was conducted, the median compensation of the CEO at an S&P 500 company jumped almost 24%. You might expect that such generous compensation would pay for itself through company performance. But the authors of the report cite research showing that among S&P 500 companies, the largest increases in total compensation actually correlated poorly with improvements in long-term corporate performance.

Since mutual funds are among the largest shareholders of any public company, they generally hold a lot of sway in determining CEO pay. According to the report, "Failed Fiduciaries: Mutual Fund Proxy Voting on CEO Compensation," mutual funds hold some 25% of the market cap of all U.S. companies, and the 10 largest fund companies manage 48% of all fund assets. That gives mutual funds a lot of influence.

What's more, fund managers have a fiduciary duty to vote their shares in the best interest of their own investors. Yet the proxy filings examined for the report show that many fail to do just that.

The fund families with the biggest tendency to rubber-stamp CEO salaries include AllianceBernstein (AB), Barclays' Global Investors, a unit of Barclays PLC (BCS), and AIM Investments, a unit of Invesco (IVZ). The report dubs them "pay enablers."

On the positive side, TIAA-CREF, T. Rowe Price (TROW) and Columbia Management lead the list of companies wielding their influence to keep CEO salaries in line. The report refers to these three companies as "pay constrainers."

There are also signs some mutual fund companies are becoming bolder at challenging executive pay. Five of them -- Fidelity, Putnam, Legg Mason (LM), Morgan Stanley (MS) and T. Rowe Price -- decreased the percentage of management proposals they supported by more than 5% during the time period covered by the latest report compared with the period of the previous report. For example, between July 2005 and June 2006, Putnam supported 47.1% of management proposals, down from 59.3% a year earlier.

Only one company, Merrill Lynch (ML), increased the number of management proposals for executive pay that it supported by more than 5% from one year to the next.

The table below ranks all 29 mutual fund companies according to their voting records, with the firms at the top of the list doing the best job of constraining executive compensation and the ones at the bottom of the list doing the worst job.

Is Your Fund an Enabler or a Constrainer? U.S. funds ranked by dilligence in keeping CEO pay scales in check
Rank	Fund
1	TIAA-CREF Asset Management
2	T. Rowe Price Group
3	Columbia Management
4	Federated Investors
5	J.P. Morgan Funds
6T	Janus Capital Group
6T	DWS Scudder
8	Legg Mason Funds
9	Schwab Funds
10T	Franklin Funds
10T	Templeton Funds
10T	MFS Investment Management
13T	Salomon Brothers
13T	American Century Investment Management
15	Putnam Investments
16	Smith Barney Asset Management
17T	Oppenheimer Funds
17T	Vanguard Group
17T	Fidelity Investments
20	Dreyfus Corporation
21	Morgan Stanley Funds
22	Van Kampen Investments
23	American Funds
24T	Merrill Lynch Investment Managers
24T	Ameriprise Financial
26	Lord Abbett
27	AIM Investments
28	Barclays Global Investors
29	AllianceBernstein Investments
T = Tied Source: The American Federation of State, County and Municipal Employees (AFSCME), the Corporate Library and the Shareowner Education Group.

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