Vanguard Partnership Plan Pays Despite Performance

by Dan Wiener | June 25, 2012 1:00 pm

It pays to be a Vanguard partner—particularly if you’re one of the top dogs.

Wednesday, Vanguard announced over its internal communications system, CrewNet, that the 2011 Partnership Plan distribution would rise more than 10% from its 2010 levels. With Vanguard’s top dogs earning the bulk (90% or so) of their compensation from the Partnership Plan, this amounts to a nifty 10% raise — a significantly better return than would have been earned investing in one of Vanguard’s broad-based index funds.

The Partnership Plan is Vanguard’s internal profit-sharing mechanism designed to reward all employees, from top management to phone operators, with a piece of the savings the low-cost fund provider generates each year.

Based in large measure on assets under management rather than performance, and factoring in the “cost savings” that accrues by comparing Vanguard’s average operating expense ratio to industry averages, the Partnership Plan pays out millions of dollars a year to Vanguard’s top dogs, while limiting most employees to a bonus that is capped at 30% of base compensation.

Since Vanguard founder Jack Bogle created the plan in 1984, dividends from the plan have compounded at a 14.0% annualized rate, which is a fair bit higher than the 10.2% annualized return from Vanguard’s flagship 500 Index fund.

Yes, it pays better to be a Vanguard employee (and even better to be an executive) than it does to invest in an index fund — even one as well-loved as 500 Index. (Of course, since Vanguard provides no disclosure on whether its top execs, other than chairman Bill McNabb, invest in any of Vanguard’s index funds, there’s no way of knowing whether these corporate managers eat their own cooking or not. And why should they, given the lucrative Partnership Plan profits they receive each year?)

Given that asset growth is a key component in calculating the value of the dividend each year, it’s a good bet that Vanguard will be raising payouts even more in 2013, as the company has been a leader in the industry in new-money flows this year.

The Perks Of Partnership (chart)

For those who want to see more on the subject of the Partnership Plan, I can recommend the updated version of Lewis Braham’s book, The House That Bogle Built, which goes into some detail on the Vanguard plan and some of the more controversial aspects of how “profits” at this “non profit” are calculated.

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