(PUB) Investing 2016

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The Independent Adviser for Vanguard Investors • July 2016 • 7 FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641
PARTNERSHIP
Steady As She Goes on Partnership Dividends
IT’S “STEADY AS SHE GOES” at
Vanguard’s Partnership Plan, where
executives will see a 12.0% increase
in their dividend, to $185.44 from
$165.57 for 2015.
Asset growth over the trailing three
years fell a bit, from 73% to 56%,
about on par with the trailing three-
year growth rate that generated a simi-
lar 12.0% rise in the Partnership Plan’s
dividend two years ago. Vanguard’s
board uses a three-year trend to help
them determine just how big the annu-
al Partnership Planpayout will be.
Unlike last year, Vanguard didn’t
pay out a special “40thAnniversary”
dividend, so there may be some
grumbling on the Vanguard campus if
expectations exceeded reality.
Vanguard long ago stopped disclos-
ing the data that allowed me to calcu-
late the annual compensation then paid
to founder Jack Bogle and Vanguard’s
second chairman, Jack Brennan. But
assuming that both men were both
still in the mix, and assuming that nei-
ther one was awarded a single addi-
tional share in the Partnership Planafter
the period when disclosures ended,
and applying a haircut to keep my
numbers on the low side, I estimate
Bogle’s Partnership Planpayout for
2015 would have totaled about $18.8 mil-
lion and Brennan’s around $10.8 million.
Of course, neither Bogle nor Brennan
works at Vanguard any longer, and they
were required to give up their shares
in the Partnership Program when they
left. But the numbers give at least some
insight into how well the top dogs (like
current chairman Bill McNabb) are
probably being compensated. It may
not be hedge fund money, but it isn’t
seaman’s wages, either.
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 profits the low-cost
fund provider generates each year. Based
in large measure on assets under man-
agement, rather than fund performance,
and factoring in the “cost savings” that
accrues by comparing Vanguard’s aver-
age operating expense ratio to industry
averages, thePartnership Plan pays out
millions of dollars a year to Vanguard’s
top dogs, while limiting most employees
to a bonus that is calculated using a
tricky set of variables related to their
job “grade” and tenure to determine the
ultimate payout.
The calculations that determine
the Partnership Plandividend are
done in secret, and Vanguard doesn’t
normally provide many details about
their Partnership Plan, which was
established by Jack Bogle in 1984 but
has since been rejiggered to limit pay-
outs to the “crew” while keeping pay-
outs high for the “captains.” Since its
first year, the Partnership Plan’s divi-
dend has risen from $3.43 to the current
$185.44, growing more than 54 times.
The value of one share of 500 Index
has, with all distributions reinvested,
grown 24 times over the same period.
The takeaway for a Vanguard inves-
tor is pretty clear. Vanguard is not, and
has never been, a non-profit, though
much of the language around “operat-
ing at cost” does, at times, make it
sound as though they are. The company
is exceedingly profitable, and hence has
the ability to pay its captains millions
of dollars every year. (90% of the top
executives’ compensation comes in the
form of dividends from the Partnership
Plan.) As Jeff has pointed out in the
past, just one fund like Total Stock
Market Index generates hundreds of
millions of dollars in fees each year.
Indexing may have made some
investors wealthy over the three
decades the Partnership Plan has been
around, but the successful marketing
and running of index funds is contrib-
uting even more to the bank accounts
of Vanguard’s executive team. n
Dividend Growth Holds
Steady Under McNabb
1985198719891991199319951997199920012003200520072009201120132015
Partnership Plan Dividend Growth-20%
-10%
0%
10%
20%
30%
40%
50%
60%
With Rising Assets,
Dividends Should Grow
19951997199920012003200520072009201120132015
Three-year asset growth
Partnership dividend
-20%
0%
20%
40%
60%
80%
100%
120%
140%
160%
Partnership Distributions
Have Outpaced 500 Index
1985198719891991199319951997199920012003200520072009201120132015
Partnership dividend
500 Index fund
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
Vanguard is exceedingly
profitable, and has the
ability to pay its captains
millions of dollars
every year.