Public plans up ante on pay
Use of incentive bonuses for investment execs growing
January 7, 2007 - By Doug Halonen – Word that some top public pension plan investment executives are receiving more than $500,000 a year in salary packages that include performance-based compensation is spurring officials at other public funds to review their own pay structures.
“I see what’s happening in other funds, and I want to be proactive,” said Craig Slaughter, executive director of the West Virginia Investment Management Board, Charleston, which oversees $7.8 billion in state pension and worker compensation assets. The board is considering hiring a consultant to study what other public funds and endowments are paying their investment executives, he added.
The interest in compensation for public fund investment officials follows news late last year that Matt Clark, the state investment officer who oversees the $6.8 billion South Dakota Retirement System, Pierre, took home $509,000 in 2006 — a $216,000 bonus on top of his base salary of $293,000, Mr. Clark confirmed.
At the $100 billion Teacher Retirement System of Texas, Austin, newly hired Chief Investment Officer T. Britton “Britt” Harris IV, who receives a base salary of $402,000, can also get incentive bonuses under a performance-based compensation system launched July 1 that could net him a total of $700,000 in 2010, according to Howard Goldman, a spokesman for the system. Mr. Harris was formerly chief executive officer of Bridgewater Associates, and also had been president and CIO of Verizon Investment Management, which manages about $62 billion in pension assets for Verizon Communications Inc., Stamford, Conn.
Staying competitive
Michael Travaglini, executive director of the $45.5 billion Massachusetts Pension Reserves Investment Management Board, is one official at a major public fund who said he would ask his board members for their thoughts on performance-based compensation. Mr. Travaglini said he wants to ensure his staff is compensated competitively.
“Knowing what other public pension plans pay their CIOs, the board (of the $35.4 billion State Retirement & Pension System of Maryland) is concerned about getting quality candidates with our current pay structure,” added Anne Budowski, a spokeswoman for the system in Baltimore. The Maryland system’s CIO post has been vacant since February 2006; the position’s compensation is capped at $148,245 a year with no performance-based bonus to sweeten the package, according to Ms. Budowski. She said the subject has been discussed by the board.
Financial industry consultants say South Dakota and the Texas Teachers system are on the leading edge of where the public fund industry should be.
“It’s folly for public entities not to pay for performance,” said Robert D. Arnott, chairman of Research Affiliates LLC, an investment management firm in Pasadena, Calif.
An incentive
Executives at plans that provide performance-based bonuses said they use them to spur the growth of fund assets — and to help attract and retain the services of the investment talent needed to do just that.
“It does incentivize employees in performance,” said Brad Pacheco, a spokesman for the $228.4 billion California Public Employees’ Retirement System, Sacramento. “It’s also helped us retain investment staff that are important to our success.” CalPERS CIO Russell Read gets an annual base salary of $534,000, and a performance bonus of up to 75% of his base salary that could net him $934,500.
“We have a lot more ability to compete with the private sector,” added Katie Kaufmanis, a spokeswoman for the $36 billion Colorado Public Employees’ Retirement Association, Denver, which also offers performance-based compensation.
Political concerns
One hitch to performance-based pay for public plan investment executives is that such a move can be politically sensitive — especially when the compensation is far beyond that of many voters.
“Being in the public sector, bonuses can be a touchy situation because you’re in a fishbowl and the public doesn’t always understand it,” said West Virginia’s Mr. Slaughter.
“They’d love to do something, but they’re in a box politically,” added Alan Johnson, managing director of executive compensation consultant Johnson Associates Inc., New York.
Yet South Dakota’s Mr. Clark said the bonuses that he and the state’s 21 other investment professionals can receive total less than what the external investment managers retained by other public pension funds reap. “The managers they hire make far more than our people make,” Mr. Clark said. South Dakota pays a performance-based bonus of up to 100% of base pay to its investment staff, which manages more than 80% of the state’s pension assets.
Added Brenna Neuharth, a spokeswoman for the California State Teachers’ Retirement System, Sacramento: “While CalSTRS is a state agency, we are also a world-class financial services organization managing more than $150 billion in assets for our members. The larger our fund gets, the more difficult it becomes to find opportunities for returns. We now have a pay structure that will help us to compete for top talent on a national level and we’ve managed to do so while keeping our operation costs among the lowest of our peers.”
CalSTRS CIO Christopher Ailman could double his base salary of $300,000 with a bonus of up to 100%, netting him $600,000 this year.
Other public funds that have created performance-based compensation systems, according to spokesmen for the systems, include the $76.4 billion State of Wisconsin Investment Board, Madison; the $57 billion Pennsylvania Public School Employees’ Retirement System, Harrisburg; and the $51.3 billion Virginia Retirement System, Richmond.
Bonuses still small-ish
Despite the compensation moves by these plans, their bonuses still lag behind bonuses at private investment firms that can reach up to 300%, according to Steven Niss, managing director of the executive search firm Fiderion Financial Services Group LLC, Atlanta.
“Public pension plans are running a lot of money,” Mr. Niss said. “If they’re going to attract the kind of staff they need, they’re going to have to pay for some good people with sophisticated investment knowledge and experience.”
By way of comparison with public funds, Glenn Buggy, partner, asset and wealth management, for the executive search firm Christian & Timbers LLC, New York, said CIOs for actively managed corporate pension plans receive total annual compensation that can reach “high six figures, and in some cases more than $1 million.”
“It (public fund use of performance-based compensation) is still quite rare, but the fact they’re talking about it and considering it is a big step,” said Michael Martinolich, a partner at the executive search firm Cromwell Partners, New York.