Pension fund also sells off largest timber portfolio
CalPERS on Wednesday voted to retain its current CEO incentive plan, which is the same for all executive staff, rather than switch to a plan that would have been based only on qualitative factors.
The board of the $359.3 billion California Public Employees' Retirement System, Sacramento, approved a proposal of the performance, compensation and talent management committee at its Tuesday meeting. Under consideration was whether to change the CEO's incentive plan to one based only on qualitative factors: board support; open and transparent communication and relationship building; effective organization; supportive and engaged leadership; customer satisfaction-driven organization; and staff engagement. In the current plan, only 25% of the CEO's incentive is based on the six qualitative, high-level leadership factors. The rest of the CEO's incentive is based on metrics including pension fund performance, stakeholder engagement and enterprise operational effectiveness.
During the performance, compensation and talent management committee discussions on Tuesday, Priya Mathur, board president, said she preferred providing incentives for the CEO the same way as the rest of the team.
"I just keep coming back to the fact that having the right alignment between the CEO all the way down through the organization is really the best practice," she said.
However, during public comment, former board member J.J. Jelincic objected to the top executive incentive system that provides an incentive payment even when the executive has underperformed targets.
"I believe you should hire the skill sets you need and you should pay them appropriately. A paycheck is the compensation you get for doing your job. A bonus is for going beyond expectations. I do not believe it is the act of a prudent person to say I will pay you a bonus for doing your job," he said at Tuesday's performance, compensation and talent management committee.
Separately, CalPERS sold one of its main timberland portfolio investments, Crown Pine Timber, at a loss in the third quarter.
Performance of CalPERS' $2 billion timberland portfolio has struggled, said Andrew Junkin, president of Wilshire Consulting, one of CalPERS' general investment consultants, on Monday.
"We know that (performance struggled) largely due to that one asset with lots of concentration in the southeast timber markets," he said. Mr. Junkin noted that southeast timber prices have been down since the financial crisis because that is the timber used in home construction. Other factors contributing to the portfolio's underperformance were "just the poor timing on the purchase, which you can't know in advance that the market's going to collapse," leverage and "a challenging governance structure."
CalPERS sold the portfolio now because there was a large principal payment coming due and staff and Wilshire executives concluded that CalPERS would be better served by investing in core real estate, he said.
"So, I think that added some speed to the process but in no way was this a panicked move," Mr. Junkin said.
He added the sale was part of CalPERS' decision to move its real assets portfolio's focus to investment in high-quality, income-producing core real estate from a balanced approach of income and capital appreciation.
There is now less focus on investments like timber and so CalPERS' timber assets "then had to be managed kind of as part of the land of misfit toys," he said.
CalPERS' forestland portfolio underperformed its benchmark for the one, three, five and 10-years ended June 30. The portfolio earned 1.9% compared to the 3.8% benchmark return for the year, -2.4% (3.4% benchmark) for the three years, -1% (6.1%) for the five years and -1.1% (4.1%) for the 10 years ended June 30. These returns do not include additional markdowns from the sale of the Crown Pine Timber portfolio.
The market value of CalPERS' investment in Crown Pine Timber — known as Lincoln Timber, a hedge fund of one managed by timber management organization Campbell Global — was $1.6 billion as of June 30. In October 2007, CalPERS had committed $2.2 billion to invest in 1.5 million acres in eastern Texas and western Louisiana, documents on CalPERS' website show.