Investment losses and increasing political pressure are combining to make it more difficult for public pension plans to provide incentive compensation for their internal investment managers.
Officials in some states have attempted to block bonus payments provided under contract to pension plan investment officers who have beaten their investment benchmarks. Robert Borden, chief investment officer of the $25 billion South Carolina Retirement System Investment Commission, Columbia, saw his $176,000 bonus payment unsuccessfully challenged by State Treasurer Converse Chellis. Mr. Chellis opposed the bonus because it would come amid state funding declines and employment cuts, and because the system had lost money during the current economic crisis.
The $62.9 billion State Teachers Retirement System of Ohio , Columbus, also was besieged by objections from current and former employees about the $6 million in contractually obligated performance bonuses paid to its internal investment managers in 2008 when performance was poor. But because several managers beat their investment benchmarks, the bonuses were paid.
The political pressure surrounding investment bonuses wont ease soon. Alan Johnson, managing director at executive compensation firm Johnson Associates Inc., New York, said such pressure will continue well into 2009 and possibly 2010 as state budgets remain under pressure and might face future cuts.
The environment you are working in, a state that might be financially under siege and going broke, paying a bonus to someone is going to be a real problem, Mr. Johnson said. Bonuses are going to come under increasing scrutiny and be a bigger political football than before.
Because state employees and their salaries are often on the public record, Mr. Johnson said payment of bonuses, ranging from 30% to 100% of yearly salary, ranging between $125,000 to $300,000, is readily available for scrutiny and fodder for public discourse. Incentive pay usually is contractual in that states say they will pay some form of incentive compensation, but the actual dollar amount is not finalized until the governing investment board decides close to the end of fiscal year.
However, Mr. Johnson said while states often retain the right to cancel incentive pay, to do so would be horrific, as investment staffs would likely leave for the private sector and its slightly higher base pay and incentive packages that could be 300% or more of base salary.
If state plans do not pay bonuses they will not be competitive with the private sector; they are kind of forced to pay, said Mr. Johnson.
According to the $55 billion Pennsylvania Public School Employees Retirement System, Harrisburg, website, the average incentive payment to internal managers for the year ended June 30, 2008 was $40,672.
External manager bonuses are normally included in their negotiated general fee structures between the state and the money management firm. The state never directly pays or compensates a money management firm manager, so the amount of incentive compensation, usually much more than their public counterparts, is not part of the public record.