- Jack Bogle, the founder of the Vanguard Group and the index fund, died at the age of 89 on Wednesday.
- In his 2018 memoir, “Stay the Course,” he said one of the most “important landmarks” of his career was creating a system that linked compensation to both lowering fees and increasing returns for customers.
- This article is part of Business Insider’s ongoing series on Better Capitalism.
Berkshire Hathaway CEO Warren Buffett once said Vanguard Group founder Jack Bogle was a “hero” who “had probably done more for the average investor than any man in the country.”
Bogle, who died Wednesday at the age of 89, created the first index fund for individual investors, allowing regular people to essentially “own the entire market” and have their savings follow the inevitable growth of the market over time. He offered a product with low fees and solid returns, and now Vanguard has more than $US5 trillion under management.
In his 2018 memoir “Stay the Course,” Bogle wrote that his Vanguard Partnership Plan “maybe the most important landmark” of his entire career, “for it was designed to solidify the community of interest between our crewmembers [employees] and the shareholders that they serve … to care about one another and to care about our investors.”
When Bogle founded Vanguard in 1975, he said he set out to be “the world’s lowest cost provider of mutual funds.” As the firm grew, however, he found that some of his employees were afraid their wages would be kept down to achieve this goal. By 1984, he felt Vanguard was successful enough that he could find a solution to that problem, and it’s how he ended up with the Partnership Plan.
Bogle said that because Vanguard’s mutual funds were owned by shareholders and not an external management company, he couldn’t formally calculate the company’s earnings. Instead, he decided earnings would be considered: the difference between Vanguard’s expense ratios (the percentage of a fund’s earnings that go toward operational expenses) and those of their largest competitors applied to Vanguard’s assets under management, combined with the extra returns due to funds’ performance.
A portion of that value would be linked to the Partnership Plan, which was then distributed to employees in amounts related to their position.
All that is to say, if Bogle’s employees could find ways to lower fees and raise returns, they would make more money.
And for veteran executives of the company, a large slice of their annual salary, a third or more, comes from the VPP.
“The results have been phenomenal,” Bogle wrote, noting that, “earnings per unit of the VPP have grown steadily over the years, from $US3.43 in 1984 to $US248.45 in 2017, a compound annual rate of 13.9%.”
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