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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 - Get Report), Barclays' Global Investors, a unit of Barclays PLC (BCS), and AIM Investments, a unit of Invesco (IVZ - Get Report). The report dubs them "pay enablers."

On the positive side, TIAA-CREF, T. Rowe Price (TROW - Get Report) 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 - Get Report), Morgan Stanley (MS - Get Report) 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.

Michael Katz joined in 2007. Michael has previously worked as a reporter at Forbes and an editor for two custom publishers, SmartMoney Custom Solutions and HNW Inc. He also worked in London as a freelance media reporter and correspondent for Broadcasting & Cable magazine. Michael has a B.A. in English from the University of Virginia.

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