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Are Fund CEOs Worth What They're Paid?

Corporate proxy season is upon us, and among other things, that means that we get a window into the compensation of corporate executives. So this week I thought I'd take a look at some of the mutual fund industry's highest paid CEOs. (Many of the largest fund firms -- such as Fidelity, Vanguard, and American Funds -- are not publicly owned, and thus are not required to disclose executive compensation. The CEOs discussed here run publicly-held fund managers, which gives us access to their compensation.)

For this post, I took a look at five of the highest-paid mutual fund CEOs in 2010. Leading the way is Gabelli Asset Management's Mario Gabelli, who earned $56 million in 2010. Gabelli has a history of earning compensation that would make most hedge fund managers blush, so it's not surprising that he tops this year's list.

In second place is Affiliated Managers Group's Sean Healey, who earned $20 million. Invesco's Martin Flanagan is next, with $11 million in compensation, followed by Thomas Faust of Eaton Vance, who earned $8.9 million, and Principal's Larry Zimpleman, at $8.2 million.

While those totals are high, it's important to consider them in relation to the value their firms have created. And unlike the leaders of the typical publicly-held company, these leaders owe a fiduciary duty not just to their public shareholders, but also to the clients who own their funds. Given that, I thought it would be interesting to compare the four year compensation totals of these fund executives to the rewards that their mutual fund investors have earned.

The table below shows how much each of these executives has earned over the past four years, compared to how much money their fund shareholders have earned:

CEO Total Comp., 2007-2010 Fund Shareholder Earnings
Gabelli $216m $1.6b
Healey $69m -$1.5b
Flanagan $38m $1.1b
Faust $30m $2.7b
Zimpleman $24m $1.9b
Total $377m $5.8b
Doesn't look too bad, right? Even with the cumulative loss of $1.5 billion suffered by Affiliated's fund shareholders, the group overall has earned nearly $6 billion over the past four years.

But before these CEOs break out the champagne and dial up their compensation consultants, it might help to put those fund shareholder earnings in perspective. For it turns out that the returns that generated those seemingly right dollar amounts were in fact rather mediocre.

In the table below, I contrast the dollars earned by the fund shareholders to those they could have earned had these CEOs' funds been able to simply match the 4.2 percent return provided by a 50/50 mix of the Total Stock and Total Bond market indexes.

CEO Dollar-wtd Fund Returns Actual Shareholder Earnings Potential Shareholder Earnings Difference
Gabelli 2.1% $1.6b $2.1b -$0.5b
Healey 0.5% -$1.5b $4.4b -$5.9b
Flanagan 0.3% $1.1b $29.3b -$28.2
Faust 0.9% $2.7b $12.0b -$9.3
Zimpleman 1.3% $1.9b $6.4b -$4.5
Total/Avg. 1.0% $5.8b $54.2b -$48.4b
Puts those amounts in quite a different light, doesn't it? Over the past four years, the shareholders of these executives' funds have earned a cumulative dollar return that was just 11 percent of the amount they would have earned in a simple 50/50 stock/bond index fund. It's hard to find a way to describe that ratio that doesn't include the word pathetic.

I'm all in favor of CEOs being well compensated for superior performance, but in the case of this group, they've been extremely well compensated for extraordinarily bad performance. Kind of makes you wonder what their directors would decide to pay them if their firms' funds ended up providing decent returns.

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