Pay, incentives on rise in attempt to keep top talent from defecting
updated with correction
Some public pension plans are giving their chief investment officers a raise.
These pension boards are increasing base pay or, more often, sweetening incentive pay as a way to keep the executives in place, or attract new talent should an opening occur.
In recent months, the $354.7 billion California Public Employees' Retirement System approved paying its next chief investment officer as much as 64% more in combined annual base pay and potential bonus. The move came one month after current CIO Theodore "Ted" Eliopoulos announced plans to step down by the end of this year. And Boston-based Massachusetts Pension Reserves Investment Management Board in November gave its CIO a 9.3% raise that started Dec. 1, plus his full bonus based on pension plan performance.
CalPERS in 1997 was one of the first U.S. public funds to implement incentive pay for its CIO based on meeting or exceeding investment benchmarks. Today, about half of U.S. public plans offer incentive pay to their CIOs, a practice that's stepped up in recent years, industry sources said.
"Historically there has been a significant percentage of public pension plans that have not paid incentive compensation; they have been base salary only," said Renee Neri, New York-based partner and head of asset management Americas at Heidrick & Struggles International Inc., an executive search firm. "But we're starting to see an increase in the incentive-based compensation." The bonuses are tied to meeting or exceeding benchmarks set by the board or some other metric.
Still, even with incentive pay, public pension plan CIOs make a fraction of what they could make at a corporate pension fund, endowment, foundation or money management firm.
A big reason to increase compensation and incentive pay is the ability attract talent, Ms. said.
At Sacramento-based CalPERS, the board agreed in June to increase compensation for its next CIO to a range of $424,500 to $707,500 per year, in addition to incentives up to 150% of salary. That would amount to a maximum of $1.8 million annually.
According to an analysis by CalPERS' executive compensation consultant Grant Thornton LLP, the median salary range for CIOs in its comparison group is $396,000 to $594,000 with a $495,000 midpoint; CIO salaries in the 75th percentile are $452,800 to $679,200 with a $566,000 midpoint.
The board also gave CalPERS' CEO the authority to select an incentive target for the CIO, which was 50% of salary before the raise.
Mr. Eliopoulos' salary range is $408,000 to $612,000, with an incentive of up to 75% of salary for a maximum of $1.1 million a year.
For fiscal 2017, Mr. Eliopoulos' bonus was $314,305, about 45% of his base pay. Awards for the 2018 fiscal year will not be announced until September.
Sometimes, salary increases run into political challenges.
The New Mexico Educational Retirement Board, Santa Fe, has tried, unsuccessfully, to give raises to various members of its executive management team since spring of 2016. Those efforts included a 9.5% raise, to $260,000, for CIO Bob Jacksha in April 2017. Each time, the New Mexico Department of Finance and Administration has revoked the raises.
In an analysis by New Mexico consultant McLagan Partners of other public pension plans of similar size, salaries of New Mexico Educational's investment staff came in at dead last, said Mr. Jacksha. His salary was near the bottom, he said.
The $12.9 billion pension fund earned 9.7% for the year ended March 31, underperforming its benchmark of 10.4%, but it outperformed its benchmark for the five- and 10-year periods. The pension fund's annualized return for the five years was 7.8%, compared to 7.3% for the benchmark, and for the 10 years it returned 6.5% vs. 5.8%.
Mr. Jacksha only receives a flat salary, he does not get incentive compensation.
"When I meet with colleagues every year, it's (incentive pay) a topic of discussion." Mr. Jacksha said."More and more (public pension plans) have been adopting incentive pay over time."
Consultants estimate roughly 50% of plans appear to offer incentive pay. Still, Mr. Jacksha is not a fan of incentive pay in general.
"If the idea is to make people work harder, try harder, I see people working as hard as they can for a flat compensation," Mr. Jacksha said. "I worry that if you put in incentive program — it's so complicated to administer — and I worry you might incent the wrong thing. … If a person is working for incentive bonus, do I want that person anyway?"
There's one exception, he said, and that is if incentive compensation tied to a performance outcome is the only way to raise overall compensation to a competitive level. "From a public relations standpoint, if you give someone a high flat salary, the public might say you're not earning it, but incentive pay is tied to an outcome."
Overall, he said he would like to keep his staff "reasonably happy."
"You need to pay staff just as well as the CIO. You need to maintain a reasonably good working environment. You need a head of agency and boards to stand up for your staff," Mr. Jacksha said.
Tweaking the models
Even pension plans that already offer their CIOs incentive pay are constantly tweaking the model, with some going beyond considering only other public pension plans when doing analysis.
Ms. Neri of Heidrick & Struggles said plans that consider a larger universe in terms of pay tend to analyze a data set composed of roughly 65% public pensions. Some comparisons include Canadian pension plans, "which do not tend to compare in the way that they compensate, so that would skew the numbers up," she noted.
Canadian plans tend to pay more to retain and attract investment teams that operate much like a captive money manager. In an effort to retain and attract top CIOs and other investment staff, public pension boards are trying to sweeten compensation.
In July 2017, the $224.9 billion California State Teachers' Retirement System, West Sacramento, considered giving the board greater discretion to adjust the CIO's incentive compensation. While keeping incentive criteria and weightings the same, the board would have been able to adjust the formula and add as much as 25% based on its determination of the CIO's overall performance for the previous plan year. The board is expected to again consider the proposal at a future meeting.
The board on July 19 approved the compensation committee's 2019 work plan, which includes a compensation analysis in May 2019. The last analysis, conducted by McLagan Partners in April 2017, found the CIO was underpaid compared with peer institutions and had lower longer-term incentive pay.
More than pay
Still, boosting pay and adding incentives does not necessarily guarantee longevity. After CalPERS increased CIO pay and instituted performance-based bonus in 1997, then-CIO Sheryl K. Pressler stayed on for just three years more before going to Lend Lease Real Estate Investments Inc. as CEO. Scott Evans, former CIO of the New York City Retirement Systems, left on June 29, the end of the current fiscal year, three years after the systems raised his base pay by 56% to $350,000.
One reason behind the campaign to retain and attract CIOs is big demand from the private sector.
"The market is very strong and they (CIOs) tend to network into their next job," said Hugh Shields, a co-founder and principal in the Chicago office of executive coaching and consulting firm Shields Meneley Partners LLC.
"They have a skill set specialized to that industry and if they have the track record (three to five years) they will be hired very quickly," Mr. Shields said. "If not, it takes a little longer and (they) may have to downsize to a smaller organization, but they will find something."
Not only are firms interested in a CIO's technical skills, but firm executives also are interested in the relationships the CIO has developed, Mr. Shields said. "Those (relationships) can serve the private company very well."