“Top administrators and investment managers at the California Public Employees’ Retirement System were awarded $4.5 million in bonuses, averaging 41% of their base salaries for the year that ended June 30,” according to a report in the Los Angeles Times. (CalPERS awards $4.5 million in bonuses to managers, 10/8/2011)
The bonuses ranged from a high of 73% of the $240,000 salary of the senior portfolio manager for fixed income to a low of 14% of the $358,280 salary for the senior investment officer in charge of risk management.
While it has been some time since I have reviewed the bonus structure at CalPERS, I suspect much of the criticism I levied in March 2009 would still be applicable. Highlights include:
CalPERS’ bonus structure suffers, to some degree, from characteristics frequently criticized in the corporate sector. Like options grants to corporate executives, CalPERS bonuses are structured with no downside risk, only upside gain. Additionally, adjustments or “clawback” provisions are needed to recoup unearned bonuses.
Points are only awarded, not subtracted. So, managers who do poorly in factors that cost tens of millions can still get a bonus based on factors that yield only tens of thousands.
CalPERS annual bonuses are weighted (1 year performance counts 10%, 3 year 40%, and 5 year 50%) Adjustments to fund valuation aren’t applied retroactively. If there is no mark-to- market accounting, staff might be getting performance bonuses based on a bubble.
CalPERS should award negative points for under-performance and should subtract these from positive basis points. Payments should also be delayed to ensure performance reflects market, rather than book, value. This is especially important for real estate, alternative investment and other managers where value isn’t measured minute by minute, as it is with most equities.
According to the LATimes, “The bonuses are based on rolling averages of returns for the last three years.” That would be a step backwards from the five year look back used previously. See my CalPERS Testimony from March 16, 2009.