Like many large employers, Vanguard Group has an internal profit-sharing plan, designed to reward everyone from top managers, who benefit the most, to full-time call-center employees.
We checked in with Vanguard watchdog Dan Wiener, publisher of the Independent Adviser for Vanguard Investors newsletter in Brooklyn, N.Y., who has an investment practice recommending Vanguard funds for clients.
Vanguard stopped disclosing its leaders’ pay years ago, so Wiener extrapolates from prior securities filings, assuming that pay methods haven’t changed that much. He broke down how he believes the plan’s profits rose 14.1 percent in 2018.
For qualifying employees, Vanguard’s profit-sharing dividends will be calculated at $283.48 per point for 2018 and $248.45 per point for 2017, up from $213.26 in 2016. (The more points you have at Vanguard, the more profit sharing you receive.)
The profit sharing has historically been based in part on assets under management rather than fund performance, Wiener said. On that score, Vanguard has been crushing competitors: Vanguard took in $1.5 trillion over the last five years, more than twice as much as No. 2 BlackRock, with $685 billion. Vanguard now manages just over $5.1 trillion in assets globally.
Wiener also factors in the “cost savings” that accrue by comparing Vanguard’s average operating expense ratio to industry averages. The more money Vanguard saves, the more it can pay workers, he believes. Based on those calculations, Vanguard’s Partnership Plan pays out millions of dollars a year to Vanguard’s top executives, while limiting most employees to a bonus that is calculated using a set of variables related to their job “grade” and tenure to determine the payout, he estimates. He doesn’t have figures for the average worker.
The profit-sharing plan’s dividends grew 14.1 percent for calendar 2018, a better return than the flagship Vanguard fund, the S&P 500 Index fund, which lost 4.5 percent in 2018.
The Partnership Plan’s dividend is derived in part from the firm’s asset growth over the trailing three years, Wiener believes. From 2016 to 2018, the dividend payout hit its fastest three-year growth rate, up 53 percent. For comparison, the Standard & Poor’s 500 Index grew 46 percent over the same period.
What does this translate to for top executives? To calculate, he posits a few things. First, assume that the late Vanguard founder, Jack Bogle, and Vanguard’s second chairman, Jack Brennan, were still employed there. (Bogle left in 1999 and Brennan in 2009; both had to give up their Partnership Plan shares when they left.)
Second, assume that neither had been awarded a single additional share in the Partnership Plan since then. Third, apply a haircut. From that, he said, “I estimate that Bogle’s Partnership Plan payout for 2018 would have totaled about $28 million and Brennan’s around $16 million.”
Such numbers give some insight into how well C-suiters, including current chief executive Mortimer “Tim” Buckley, may be compensated.
“It may not be hedge-fund money, but for a low-cost indexing shop, it sure looks pretty good,” Wiener added. The calculations that determine the Partnership Plan dividend aren’t disclosed. Bogle created the program in 1984.
Vanguard spokesperson Alyssa Thornton declined to comment on the profit-sharing details. “Consistent with years prior, we don’t discuss the specifics of our compensation program, except to say that Partnership enables our crew to celebrate and share in the success and value they’ve helped to achieve on behalf of Vanguard investors,” she said in an email.
The takeaway: “Vanguard is not, and has never been, a nonprofit, though much of the language around ‘operating at cost’ does at times make it sound as though they are,” Wiener said. Vanguard “is exceedingly profitable, and hence has the ability to pay its captains millions of dollars every year." Just two funds, 500 Index and Total Stock Market Index, generated about $600 million in fees alone last year, estimated Wiener’s colleague Jeff DeMaso.
The Securities and Exchange Commission’s Philadelphia Regional Office will host an event for senior investors on Tuesday, June 11, from 9:30 a.m. to 3 p.m. at Montgomery County Community College, College Hall 144/148/151, 340 DeKalb Pike, Blue Bell. This event is free to the public and lunch will be provided.
Register by email (SECSeniorOutreach@sec.gov) or call 215-597-0200 and provide your name, phone number, and whether you require special assistance for a disability.
“An important reason why we come to work every day is to help people understand investing and how to identify potential fraud," said Jeffrey Boujoukos, regional director of the Philadelphia office of the SEC.