Mutual Fund CEOs Highly Overpaid, Union Study Charges

By Randy Hall | July 7, 2008 | 8:05 PM EDT

( - Major mutual fund companies are "prime enablers" of the explosive growth in compensation for corporate executives, according to a union-sponsored study released on Tuesday.

However, a representative from a pro-business organization called it "ironic" that the report also indicates most shareholders approve of the jobs their CEOs do and the pay they receive.

Entitled "Enablers of Excess: Mutual Funds & the Overpaid American CEO," the study was prepared by the American Federation of State, County and Municipal Employees (AFSCME), the nation's largest public service employees union, and the Corporate Library research firm.

Using newly available Securities and Exchange Commission (SEC) proxy voting data, the report documents what the AFSCME calls the "systematic unwillingness" of mutual fund firms, which own nearly one-fourth of all U.S. publicly traded companies, to use their voting power to hold down executive compensation.

The study examined votes cast by 18 of the largest 25 mutual funds at 1,642 shareholder meetings from July 2004 to June 2005 and found that as a voting bloc, the mutual funds voted in favor of management compensation proposals in about 75 percent of all cases.

However, shareholder proposals -- which overwhelmingly called for CEO pay reform -- were supported only about 25 percent of the time.

Morgan Stanley Funds was listed as the "worst offender" for supporting management compensation proposals 95 percent of the time. The report also named AIM Investments, Dreyfus Corp., AllianceBernstein and OppenheimerFunds in the industry's five worst "pay enablers."

"Like a bartender who pours drink after drink for a patron with an obvious drinking problem and no way home, these mutual funds are helping to feed the executive compensation beast with no regard for the consequences," said AFSCME International President Gerald W. McEntee.

"Corporate America has a CEO salary problem, and it's time for these mutual funds to take some responsibility for turning off the tap," McEntee added. "After all, they're required by law to protect the interests of their shareholders."

According to the study, the mutual fund firms most likely to challenge executive pay packages were TIAA-CREF, American Century, Federated and Vanguard. TIAA-CREF supported shareholder proposals 53 percent of the time, while Federated opposed management proposals 61 percent of the time.

McEntee noted that in 2004, executive compensation at more than 1,500 large U.S. public companies grew at twice the rate of the previous year, meaning CEOs received 14 percent raises during that period after receiving 7 percent raises in 2003, he stated.

Today, the average CEO earns $11.8 million annually in salary, bonuses and long-term equity-based incentives, according to a 2005 survey by the Institute for Policy Studies/United for a Fair Economy.

Worker pay, on the other hand, has remained virtually stagnant, McEntee said. In 2004, total compensation for the average non-supervisory worker rose by 2 percent to $27,485 annually, according to a 2005 Pearl Meyer & Partners study commissioned by the New York Times.

However, Thomas Lehner, director of public policy for the Business Roundtable, told Cybercast News Service that he found it "ironic" the AFSCME was publicizing the study, since it showed that "by a large margin, the mutual funds and their shareholders approve of the jobs their CEOs are doing."

Lehner, who represents an association of chief executive officers for U.S. corporations with a combined workforce of more than 10 million employees, added that most shareholders "realize long-term value is the most important element in determining company direction."

"The truth of the matter is that factors such as executive compensation are primarily determined by the marketplace," he said. Setting the salary and benefits for CEOs is also "a function of the board, not the shareholders.

"When the company is being well run and shareholder value is being created, shareholders in turn approve and support executive compensation," Lehner added. "And that's what's happening here. The results of the study speak for themselves."

Lehner also found it significant that the report was sponsored by a union.

"When you're talking about the AFSCME and other activist groups, you have to remember that they have a political agenda," he said. "In the last few years, union membership has clearly been declining, and they've been seeking to use their investments to influence company behavior."

As Cybercast News Service previously reported, a number of unions dissatisfied with the leadership of the AFL-CIO left that organization to create the Change to Win federation. The split cost the AFL-CIO -- of which the AFSCME is a member union -- nearly 6 million workers and about one-third of its annual budget.

See Earlier Story:
Change to Win Unions Form New Labor Federation (Sept. 28, 2005)

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