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WASHINGTON — As compensation for corporate executives continues its explosive growth and CEOs routinely receive record-setting pay packages that are divorced from reasonable performance requirements, a new study shows that major U.S. mutual fund companies are a prime enabler of these troubling trends.

In a report released today, "Enablers of Excess: Mutual Funds and the Overpaid American CEO," the American Federation of State, County and Municipal Employees (AFSCME) and The Corporate Library use newly available SEC proxy voting data to document the systematic unwillingness of mutual funds to use their considerable voting power to enact executive compensation reform.

The mutual fund industry's five worst "pay enablers," judged most complicit in enabling runaway CEO compensation, are Morgan Stanley Funds, AIM Investments, Dreyfus Corporation, AllianceBernstein and OppenheimerFunds. According to the AFSCME/Corporate Library analysis, Morgan Stanley Funds was the worst offender, supporting management compensation proposals 94.7 percent of the time.

"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. After all, they're required by law to protect the interests of their shareholders."

"This report brings to light the role mutual funds play in enabling excessive compensation and helps investors determine which ones are committed to shareholder value and merit their business," said Nell Minow, editor and founder of The Corporate Library. "The time is now for mutual funds to use their voting power in the interest of shareholders to tie executive pay to actual job performance."

Despite corporate governance reforms passed in the wake of scandals at Enron, WorldCom, Tyco and Adelphia, CEO pay continues to explode. In 2004, executive compensation at more than 1,500 large U.S. public companies accelerated at double the rate of the previous year, meaning CEOs received 14.5 percent raises in 2004 after having received 7.2 percent raises in 2003. 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. In 2004, total compensation for the average non-supervisory worker rose by a meager 2.2 percent to $27,485 annually, according to a 2005 Pearl Meyer & Partners study commissioned by The New York Times.

McEntee cited Home Depot CEO Robert Nardelli as an example of the problem. Nardelli accepted an average of $31.4 million in salary, stock and bonuses annually from 2002 to 2004, while his company's stock has fallen 17 percent since the beginning of 2002 compared to a 47 percent increase at Lowe's where the CEO earned $2.4 million in 2005. "Giving CEOs record raises for record corporate losses is bad business, sends the wrong message to the corporate community and compromises the value of investments," said McEntee.

The AFSCME/Corporate Library study examined votes cast by 18 of the largest 25 mutual funds at 1,642 shareholder meetings from July 2004 to June 2005. The analysis found that, as a voting bloc, the 18 mutual funds voted for management compensation proposals in 75.6 percent of all cases, while supporting shareholder proposals, which overwhelmingly call for CEO pay reform, 27.6 percent of the time. A December 2005 Watson Wyatt study found that 90 percent of institutional investors are dissatisfied with current executive pay practices.

AFSCME is the largest union for workers in the public service with 1.4 million members nationwide. The union's members have their retirement assets invested by public pension systems with combined assets totaling more than $1 trillion. President McEntee chairs the AFSCME Employees Pension Plan, which — as an institutional investor and active owner — engages public companies on shareholder issues like restraining executive pay. McEntee said the study's core findings will make mutual fund accountability a priority issue for the AFSCME Pension Plan.

AFSCME recommends a five-point plan of action that should begin to align mutual fund proxy voting practices with shareholder interests.

1. Increased Disclosure Requirements: require full disclosure of potential conflicts of interest between mutual funds and companies for which they manage money.
2. Transparency: require that mutual funds make their proxy vote data available in an easily digestible format that can be accessed electronically by investors — a rule that would shine a spotlight on mutual funds that continue to support excessive executive pay packages.
3. Independent Chairman: the SEC should defend its new rule, that is currently in litigation, which mandates that mutual fund boards are led by an independent chairman.
4. Shareholder Advocate: require that mutual funds delegate proxy voting to independent, non-conflicted fiduciaries who are obligated to vote in the interests of long-term shareholder value.
5. Support for Shareholder Empowerment: mutual funds should vote yes on a new proposal that the AFSCME pension fund has submitted to four companies this proxy season — Home Depot, U.S. Bancorp, Merrill Lynch and Countrywide Financial. The proposal establishes a process for shareholders to vote executive pay packages up or down.