New CalPERS compensation plan to focus on incentive pay over salary

CalPERS' board on Wednesday changed the data set it will use to determine its top executives' base pay and adjusted the merit raises, effective immediately, in effect switching its compensation plan to emphasize performance pay rather than salaries starting in fiscal year 2024.

In February, the talent committee of the $444.1 billion California Public Employees' Retirement System, Sacramento, will consider a revised compensation policy that will put the performance-based approach into action, including possible changes to its short-term and long-term incentive plans. The policy only applies to CalPERS staff that are eligible to receive incentives through short-term and long-term incentive plans.

CalPERS officials are looking to revise its compensation policy to improve its "overall effectiveness," said Michelle Tucker, chief of the human resources division, at Wednesday's meeting.

Between July 2019 and September 2022, 27 of its 132-member investment team left CalPERS, Ms. Tucker said. Eleven investment professionals went to the private sector, nine officials retired and three investment executives joined another public agency, including one official who went to the $297.6 billion California State Teachers' Retirement System, West Sacramento, she said. The destinations of the rest are unknown.

The board adopted a proposal recommended by its compensation consultant Global Governance Advisors to use a peer group benchmark for investment executives of two-thirds U.S. and Canadian public pension funds and one-third private-sector organizations including money managers, endowments and insurance companies. Non-investment executives' benchmark peer group is now one-third each public pension funds, California public agencies and private organizations.

Before the change, the comparator set for non-investment executives included public pension funds, select California-based public agencies, banks and insurance companies. The peer group for investment executives already included private-sector organizations including money managers as well as public and corporate pension plans.

The board also changed the performance matrix used to give certain high-level executive and investment staff raises. CalPERS' new matrix reduces the percentage increases for the best performers with an "exceptional" rating offering a 5% salary increase from 7%, and "consistently exceeds expectations" providing a 4% boost from 5%. The raise for "fully meeting standards" is 3%, the same as meeting standards under the old matrix; a new category to be called "inconsistently meeting expectations" can be awarded a 2% raise; and an assessment of "does not meet expectations" is zero.

The majority of the employees tended to fall in the top two levels, "which is why we wanted to bring everyone back to what a normal distribution in any organization, high-performing or not, should be," Brad Kelly, GGA partner told the board

GGA executives said that the median raise in North America is expected to rise to 3% in 2022, he said. Typically, the majority of employees — 60% to 70% —hit their target of meeting expectations, with "a nice distribution above and below," Mr. Kelly said. "The cream of the crop," 25% to 30% of an organization's staff, will exceed or far exceed expectations and 5% to 10% will be low performers, he said.

"We know bringing people back down the fully meets expectations can be a psychological shift. It is not going to be easy," he said.

The idea behind the changes is to place more emphasis on incentives than on base salaries to make CalPERS a "performance culture," Mr. Kelly said.

"We think this is a sustainable way of managing compensation," he said. "We want there to be more of a focus on incentive opportunities both in the short term and long term so there is a focus on achieving those objectives, getting the returns for your fund."