Public pension plans make strides in staff pay

(updated with correction)

Two large public pension plans recently adopted new compensation plans executives hope will enable them to recruit and retain key investment professionals.

The New York City Retirement Systems and the Florida State Board of Administration, Tallahassee, devised the pay programs as a result of compensation studies showing that the plans' fared poorly among similar-size public plans. These efforts have taken place amid constant threats of competition for investment professionals posed by the private sector.

“While we can't compete with Wall Street, we have to be in the ballpark when it comes to our public pension peers,” said Scott Evans, chief investment officer of the $163.4 billion New York City Retirement Systems. City pension officials have lamented for many years that investment staff salaries were too low.

Earlier this year, the city comptroller's office authorized a study of public plans with $80 billion or more in assets. “What we found was that we were lagging our peers significantly,” Mr. Evans said.

“Armed with those results, Comptroller Scott Stringer, investment adviser and custodian of the pension system, and Mr. Evans, had to convince the trustees at each of the five pension funds within the city's system to approve a new payment system. In a few months, Mr. Evans and some 40 other investment professionals in the comptroller's office will get pay raises.”

The money will come from pension system assets, but Eric Sumberg, a spokesman for Mr. Stringer, declined to discuss details because the plan hasn't been implemented yet.

“This is related strictly to attracting and retaining talent,” Mr. Sumberg said.

Public pension plan pay was enhanced in June when the Florida State Board of Administration, Tallahassee, adopted an incentive compensation plan for Ashbel C. Williams Jr., executive director and chief investment officer, and 61 other investment staff members. The board administers the $150.4 billion Florida Retirement System.

The plan, which took effect July 1, measures staffers' performance against three levels of benchmarks. Incentive compensation is paid at different rates for different levels of investment responsibility.

Although surveys showed Florida trailed in pay relative to comparable plans, it took several years for the board to agree to the incentive pay program.

“We had to be very deliberative,” said John Kuczwanski, a spokesman for the board. “As a public fund, there are considerations to the public about the cost.''

The incentive pay system serves three purposes — retention, hiring and succession planning, he said. The board has its own budget, relying on fees charged for assets under management, which will finance the incentive pay.

Although Florida and New York City ultimately were successful in improving investment professionals' pay, some pension plans have struggled to convince reluctant overseers to approve salary increases or even new hires.

“You have to show public policymakers that there's something in it for them,” said Keith Bozarth, former executive director of the State of Wisconsin Investment Board and now a senior adviser with Funston Advisory Services LLC, a Bloomfield Hills, Mich., firm, that provides fiduciary and governance advice to pension plans.

In Wisconsin, Mr. Bozarth said it took time to achieve higher compensation and incentive pay.

“As recently as a decade ago,” compensation was so comparatively poor that SWIB had trouble recruiting graduates from the applied securities analysis program at the Wisconsin School of Business, said Mr. Bozarth, who was SWIB's executive director from 2007 to 2012.

SWIB's compensation program has been reworked several times, starting in 1988 and followed by revisions in 2000, 2007 and 2011. One illustration of the pay-plan's impact: Investment staff turnover is now 1% vs. 9% in 2000, a spokesman for the board said.

Michael Williamson, the current executive director, said SWIB has made $33 million in incentive payments over the past five years, while the investment staff has generated $1.4 billion over market returns. Noting that it costs SWIB four times more to manage an asset externally vs. internally, the incentive compensation program “is not an expense - it's an investment,” he said.

Executive search firm and pension plan officials say money isn't everything.

“Compensation in public plans is always lower, but there are lifestyle issues that attract people,” said Frederick Funston, managing director of Funston Advisory Services. “There's a lower-pressure environment, lower cost of living and slower pace of life.”

If public plans can show prospective hires an opportunity for advancement and greater responsibility, that can help overcome some concerns about pay, said Michael Kennedy, an Atlanta-based senior client partner at the executive search firm Korn Ferry.

“My sense is that many of the larger public plans are recruiting talent out of the private sector more than they did five years ago,” said Mr. Kennedy, referring to professionals one level below that of CIO.

“It's not an avalanche,” said Mr. Kennedy, adding that asset management firms are the most likely sources. “But people are getting an opportunity to head (management of) an asset class — an opportunity they might not get in the private sector.”

“We are in a war for talent,” said SWIB's Mr. Williamson. Staffing success has helped in expanding internally managed assets to 60% today from 25% in 2007, he said. SWIB manages more than $106 billion in total assets.

Each public plan faces different challenges, and search firm officials say the legislative model for public pension pay is more challenging than a trustees-model plan.

Legislators who control a pension system's purse “are far more skittish about appearing to approve salaries that the public might find "offensive,'“ said Mr. Bozarth, adding that it was “absolutely” tougher to recruit top talent for a legislative-model system. “Board members aren't running for office.”

Staff members running the $79.1 billion New Jersey Pension Fund, Trenton, need legislators' approval for higher salaries.

“Our compensation levels are low to comparable public plans,” said Brendan Thomas Byrne Jr., chairman of the State Investment Council, which governs policies for the division of investment. “We have had a reasonable amount of turnover at the higher levels: that hurts us.”

Two years ago, Robert Grady, the former council chairman, remarked at a council meeting that compensation was a “key factor” in the departure of the then-CIO as well as the co-head of alternative investments, according to council meeting notes.

At the $90 billion North Carolina Retirement Systems, Treasurer Janet Cowell, a Democrat, was able to convince the Republican-led legislature and governor to approve a law a year ago that provided the pension system with 10 more employees. The law also gave Ms. Cowell, the sole trustee of the pension system, greater flexibility in improving salaries.