At many organizations, employees can expect to wait a year before they receive their bonus. At Florida State Board of Administration (SBA), however, the wait time has been much longer – seven years.

In June, the state agency – which oversees the $148 billion Florida Retirement System – approved an annual incentive plan for its senior executives and investment staff. The program would award bonuses based in the performance of the professional over a three year period. 

The program, open to 62 professionals at SBA, had been in the works since 2008 when its current chief investment officer, Ash Williams, was in talks to join the state pension. Given the economic downturn at the time, however, plans to create it were shelved until mid-2012, when the recovery was in full swing and SBA began to vet and ultimately recommend to its board of trustees its implementation. 

SBA has seen a fair amount of turnover among its investment staff in recent years. Its senior investment officer for strategic investments, as well as analysts in its fixed income and economics units have left for jobs in the private sector, while its deputy executive director and an investment professional in its private equity unit have left to join other public pensions. 

“It’s a constant threat,” a spokesman told PERE. “We find recruiting people difficult as well.” 

The reason behind SBA’s recruitment and retention challenges isn’t hard to figure out: the state pension has severely lagged its peers in the compensation it offers its investment professionals. In a February 2013 presentation, SBA’s consultant Mercer recommended that the pension plan target the 75th percentile of the public pension market for its investment professionals’ compensation. That would equate to an average base salary of $230,900 and total cash compensation of $410,500 for the senior investment officer of real estate. However, the institution failed to meet even the 25th percentile of the market, or an average base salary of $192,400 and total compensation of $259,400. At the time, SBA’s head of real estate was paid a salary of $170,000 and no bonus.

The performance-based bonus program is intended to address this compensation gap. To qualify for a bonus under the program, an employee would need to outperform the benchmark within his or her area of investment focus by a minimum of five basis points – with each basis point representing $15 million of excess return for the pension plan – and with a target of 25 basis points. The resulting bonus would range from 10 percent to 35 percent of salary, depending on the employee’s rank and how critical his or her role was to the organization.

If SBA’s investment staff hit their respective targets, the overall incentive pool would total $1.4 million – or nine percent of SBA salaries in aggregate. The plan “rewards strong performance” and “assists in attracting and retaining top talent and increases competitive positioning against the outside market,” Mercer noted in a June presentation.

Bonus points

SBA is the most recent example of a large US public pension that has adopted a bonus and incentive compensation program in order to become more competitive with private sector firms and attract and retain top investment professionals. With performance-based incentives, the plan also aims to improve the overall performance of the pension as well as cut down on external manager costs by keeping more investment management in-house. “High-performing staff could generate significant amounts of above-benchmark performance and save their systems substantial sums of money in external management fees,” Chris Murphy and Adam Barnett, two executives at performance and reward consulting firm McLagan, wrote in a March 2009 report.

But bonus programs like those of SBA’s still haven’t been widely adopted in the pension world. Just over 50 percent of large public pension plans currently offer incentive plans, according to McLagan. Of the 10 largest US public pensions, half, including Florida SBA, now have bonus programs in place, according to information from those institutions. The other five – New York State Common Retirement Fund, New York City Public Pension Funds, New York State Teachers’ Retirement System, North Carolina Retirement Systems and Ohio Public Employees Retirement System – continue to not offer any performance-based incentives. 

The lack of bonus programs persists despite the high level of attrition at these public pension plans, which have seen a number of senior investment professionals leave in the past few years for jobs in the private sector.
Timothy Walsh, the former director of the New Jersey Division of Investment, for example, left his post in 2013 to take on a new role as president of Gaw Capital Partners USA, the North American operations of the Hong Kong-based private equity real estate firm. That same year, Lawrence Schloss, chief investment officer of the New York City Public Pension Funds, also took a private-sector job as president of Angelo Gordon & Co, an alternative investment firm that manages a number of real estate funds.

Meanwhile, Steve LeBlanc, formerly the head of private investments at the Teacher Retirement System of Texas, departed the pension in 2012 to start his own firm, CapRidge Partners. Last year, Susan Carter, director of real estate investments at North Carolina Retirement Systems, resigned from her longtime position and is now doing consulting work through her own firm, The Eastport Group.

One former chief investment officer of a state pension plan estimates that on average, public investment professionals earn two to three times less than what their private-sector counterparts make. To make an extreme comparison, one of the highest-paid CIOs at a public pension plan, Texas Teachers’ Britt Harris, earned total compensation of approximately $850,000 in its fiscal year 2014. By comparison, Stephen Schwarzman, chairman and chief executive of The Blackstone Group, one of the largest alternative asset managers in the world, took home compensation of approximately $85.89 million – more than 100 times than that of Harris. 

One could argue that Blackstone manages significantly more assets – $333 billion as of June 30 – than Texas Teachers, which had assets of $132.8 billion as of its fiscal year end in August 2014. However, the largest US public pension, the $301 billion California Public Employees’ Retirement System, has nearly the same amount in assets as Blackstone. The most recent compensation for chief investment officer Ted Eliopoulos was $717,800.

“They’re incredibly effective,” says the former CIO of bonus programs’ role in retaining investment talent. The lack of an incentive plan, he says, was a major factor in his own decision to leave his former employer, as his salary was barely sufficient to cover the expenses of raising his family where he was working at the time. “There was a huge cost in the standard of living,” he said. 

In last place

LeBlanc agrees that bonus programs are powerful retention and recruitment tools at state plans – but with one caveat. “The fact is, they’ll never compete with Wall Street strictly on compensation,” he says of Florida SBA’s new plan. “But they have to compete with CalPERS, CalSTRS, all the big state pension plans.”

Among institutional investors, public pension plans are on the lowest end of the pay scale for investment professionals. “As a general rule, they’re in last place,” said the former CIO. Even at Texas Teachers, whose investment staff are known to be better compensated than those at most other pension systems, retention still has been an issue. Following LeBlanc’s departure, Rich Hall, who had been in charge of its private equity business, was recruited by Harvard Management Company to become the endowment’s head of private equity last year, while Stuart Bernstein, who oversaw Texas Teachers’ emerging manager program, joined CapRidge. Others have gone on to take jobs at CBRE Global Investors and the pension plan at Houston’s Methodist Hospital System. The reasons for those exits included both compensation and career advancement, according to LeBlanc.

Indeed, sovereign wealth funds are reputed to pay Wall Street-level compensation, while other institutional investors, particularly university endowments, have been striving to catch up. “Endowments, over the course of time, have done a good job of moving from the middle of the pay scale to trying to match what people would make in the private sector,” says Tim Shine, one-half of the husband-and-wife team that runs Shine Associates, a Boston-based consulting and executive search firm. “They can’t offer equity or a promote, so they have asked us to look at what that cash spread would be.” 

Political football

The question, then, is why pension plans haven’t made more of an effort to keep up with the private sector, especially when they’ve been affected by a substantial amount of turnover. The New Jersey Division of Investment (DOI), for example, has seen multiple investment staff leave over the past several years, but despite internal support to address the issue, not much has been done in the two years since Walsh left. “While Treasury had long advocated for salary increases for DOI staff, such action requires legislation,” writes a spokesman in an email to PERE. “A bill increasing DOI salaries has not been introduced in the Assembly or Senate.”

One major reason for the lack of action is that bonus programs are often the subject to public criticism by politicians and others, since the beneficiaries of state pensions don’t receive bonuses themselves. The former CIO, however, argues that such opposition smacks of hypocrisy. “Constant turnover is not a good thing in an investment management group,” he says. “Public funds may fire a manager if they have too much turnover, but a fund itself may have high turnover.” 

He adds: “The incentive compensation is a very small amount. In the grand scheme of things, it’s rounding errors.” The additional compensation would be a tiny fraction of the millions of dollars in fees that these institutions pay to Wall Street firms, he notes.

Quips LeBlanc: “They don’t have a problem when it comes to the football coach.” The highest-paid public employees in many states, he observes, are the college football coaches, such as Charlie Strong at the University of Texas, who reportedly took home $5 million in 2014, and Nick Saban at the University of Alabama, who reportedly was paid $7.16 million last year. Remarking on the dramatic imbalance in compensation between the two different types of state employees, he says: “It’s what society chooses to reward them.”

It is this public scrutiny, in addition to the lack of compensation, that makes it difficult to retain and recruit investment staff at state pensions, LeBlanc adds. “In any political system, one party in the state is in power, one party in the state is out of power, and the one that’s out of power shoots at the one that’s in power, and sometimes the pension people are in the line of fire, having nothing to do with what the battle’s about,” he says.

However, “it’s not at all about pay,” he points out. “There are two forms of compensation in my view: what I call compensatory and psychic.” With jobs that benefit teachers, firemen and policemen, the psychic reward is very high, which is not the case with Wall Street jobs, where “you help the rich to get richer,” he says.

Difficult transition

Not every public investment professional, however, is well-suited for a job in the private sector. “A lot of the investment professionals on the investor side think they can make the leap,” says Shine. “Many can’t. They don’t have the hands-on experience that they need to be on the general partner side.”

Adds Shine’s wife, principal Hillary Shine: “There’s a lot of people who want to leave for the GP side for all kinds of reasons. However, many don’t have the skill sets required.” While some institutional investors do direct deals and co-investments, many public investment professionals’ experience is limited primarily to deploying capital in funds, she adds. Investment managers, however, are seeking someone who has expertise in the areas of asset management, acquisitions or development.

For this reason, Tim Shine doesn’t believe crossover from the public pension world into the investment manager space is necessarily a given. From a recruitment perspective, state plans “haven’t been fertile ground to grab talent and put them into an operational chair,” he says.

That said, “with a lot of GPs, if they can get someone from a name-brand investment shop, that’s someone who can be very additive to their team,” says Shine. “When they’re out marketing, they can say, ‘we got Joe Smith from the University XYZ,’ who knows how to deal with risk issues, portfolio balancing issues, all the things that institutional investors worry about. Therefore, the GP feels they can raise more money with this person.”

As such, there are both push and pull factors that influence public investment officers to look to the private sector for advancement. The implementation of bonus programs helps to recruit and retain some investment professionals. For others, such measures still aren’t enough and the public-to-private trend looks set to continue, unless there suddenly is an upswing in demand for university football coaches.