Massachusetts Pension Reserves Investment Management Board, Boston, approved a new compensation structure geared toward helping recruit and retain investment professionals, said Michael Trotsky, executive director and chief investment officer.
Asset class heads — public markets, hedge funds, private equity, real estate and risk management — will now be eligible for a bonus of up to 40% of compensation, from 30%. Currently, only the executive director, chief investment officer, chief financial officer and general counsel are eligible for bonuses that high.
MassPRIM, which oversees the state's $50.6 billion Pension Reserves Investment Trust fund, also will add a third tier of bonuses for non-investment staff at a maximum of 20% of compensation, down from 30% for those employees. The decrease will be partially offset with salary increases.
Other changes to the compensation structure include eliminating the current incentive “cliff” under which 20% of total incentives are earned when fund performance meets the benchmark and the entire bonus reached at 75 basis points of outperformance. Now, there will be no bonus for meeting the benchmark and the incentives increase to the maximum bonus at 60 basis points of outperformance.
Mr. Trotsky said the previous structure was approved in 2007 and these changes were enacted because the fund has moved to 33% passive investing from 20%, the average range among the fund's peers is 50 basis points of outperformance and expected returns are lower in general.
A peer group of similarly sized pension plans will be used to benchmark individual compensation, and the board can elect to defer bonus payments in years of negative absolute performance. Performance is based on three-year rolling periods and incentive compensation will now be linked to absolute returns, so the pool of bonus money will rise and fall with the absolute performance of the fund.
Mr. Trotsky said the new structure will save MassPRIM about $350,000 a year. Total staff compensation, including maximum bonuses, is less than 1.5% of total expenses on an annual budget of more than $300 million.
The state Legislature mandated MassPRIM to set up a compensation committee to address vacancy rates at the fund after the departures of CIO Stan Mavromates and two private equity senior investment officials from August 2011 to June 2012; a hedge fund position remained vacant for some time before Eric Nierenberg was hired last month as senior investment officer, hedge funds. Compensation consultant McLagan assisted the committee.