CalPERS' Bonus Bonanza?

Michael B. Marois of Bloomberg reports, Calpers Doubles Bonus Payouts to Employees as Losses Recouped (h/t: Pension Tsunami)
The California Public Employees’ Retirement System, the largest U.S. public pension, doubled bonuses to its staff as the $277 billion fund recouped losses suffered in the recession.

Calpers, as the fund is known, said it paid 130 employees and executives $7.7 million in bonuses last year, more than twice the $3.6 million in the previous year. Chief Investment Officer Joe Dear got $321,750 in addition to his half-million dollar base pay. Three investment officers were paid more than $200,000 each, according to data provided by the fund.

The bonuses, based on three-year investment returns, signal that public-pension funds are recovering from the 18-month recession that ended in June 2009, which wiped out a third of Calpers’ value. Still, the crisis left U.S. pensions short more than an estimated $1 trillion needed to cover benefits promised to government workers. Taxpayers have been asked to make up the shortfall.

The California fund says it must grant bonuses to help compete with the pay that employees could make if they went to work on Wall Street. Calpers for the past three years exceeded its benchmark by 0.43 percent, the first time since the financial crisis began in 2007, said Brad Pacheco, a spokesman.
Executive Watchdog

The total Wall Street bonus pool rose 8 percent in 2012, with employees taking home an average of almost $121,900, according to February estimates by New York Comptroller Thomas DiNapoli.

Calpers has long opposed excessive compensation for corporate executives at companies in which it invests. Last month, it voted its 12.3 million shares of Oracle Corp. against the pay packages of Chief Executive Officer Larry Ellison and other top managers.

Ellison, 69, is worth $38.8 billion and ranks eighth on the Bloomberg Billionaires Index. He was the highest-paid CEO in the U.S. this year, data compiled by Bloomberg show. His pay package declined 18 percent to $78.4 million for fiscal 2013 after he gave up an annual bonus and the company missed profit targets.

Three executives outside the Calpers investment office were paid a total of $221,805 in bonuses last year, the fund said. Anne Stausboll, chief executive officer, was paid a $99,547 bonus. Chief Actuary Alan Milligan earned $75,198 and Chief Financial Officer Cheryl Eason was paid $47,060.
Home Grown

Pacheco said spending money on in-house investment management saves about $100 million a year that otherwise would be paid to Wall Street in fees. Calpers spent $44 million last year on compensation and benefits for investment staff, compared with $1.2 billion on external managers.

Governor Jerry Brown -- who as of Dec. 1 will make $173,000 a year -- signed a law in 2012 overhauling public pensions and reducing costs by an estimated $55 billion over 30 years.

The California State Teachers’ Retirement System, the second-biggest public pension, with $172 billion under management, paid its chief executive officer Jack Ehnes a $134,400 bonus, about 43 percent of what was allowed, according to a compensation committee document. The fund’s Chief Investment Officer Christopher Ailman earned a $133,773 bonus, or about 37 percent of what was allowed.

Calstrs, which paid a total of $1.9 million in bonuses, earned 13.8 percent on its investments in the fiscal year that ended June 30, 1.8 percent the previous year and 23.1 percent year earlier.
I tweeted this article yesterday afternoon and got this response from LargeCapTrader (click on image below):

To traders who eat what they kill, seeing America's biggest public pension fund dole out twice as much in bonuses to their senior investment officers after recouping losses suffered during the recession doesn't make any sense at all. Most people would agree with him, why pay out big bonuses when the net return is zero?

CalPERS talks about the need to compete with Wall Street pay but nobody on Wall Street would still have a job if they experienced the losses CalPERS experienced during the recession. And hedge funds which typically charge 2 and 20 in management and performance fees have a high water mark, meaning they have to recoup all their losses before they can begin charging performance fees (they do however charge management fees no matter how they perform, which is why most mega hedge funds have become large asset gatherers).

But there are no high water marks in Pensionland. Compensation is typically based on three or four year rolling returns and value added over their (benchmark) policy portfolio. Both CalPERS and CalSTRS posted strong gains last year, returning 12.5 percent and 13.8 percent for the year that ended June 30. Over the last three years, they have added value over their benchmark portfolio, which is why they got paid bonuses. And while CalPERS' bonuses are raising eyebrows, they pale in comparison to the hefty payouts their Canadian counterparts receive.

Having said this, there are a few points worth noting. First, OTPP, PSP Investments, and CPPIB -- the three Canadian funds with the largest payouts -- pay their senior officers based on four-year rolling returns, not three-year rolling returns. In the case of OTPP and PSP, they added significant value added over their policy portfolio over the last four years, which is why their senior officers received millions in bonuses.

Now, we can argue whether senior officers at Canadian public pension funds are overpaid given their assets are captive but their compensation is determined by an independent board which looks at industry standards when determining compensation. Truth be told, most people in finance at senior levels are grossly overcompensated and they know it but that is not the discussion I want to embark on. As I've repeatedly stated, Canadian public pension funds got the governance and compensation right which is why they've significantly outperformed their U.S. counterparts over the last ten years, both in terms of net returns and value added over benchmark portfolio.

Second, I do not understand the discrepancy between the compensation at CalPERS and CalSTRS. If you ask me, compensation at CalSTRS is way too low. They need to hike it significantly, especially if the added value over their policy portfolio over the last three years is on par or better than that at CalPERS (and CalSTRS has a tougher policy portfolio to beat than CalPERS).

Third, I don't think CalPERS or CalSTRS' senior officers are overcompensated. In fact, I think they are under-compensated relative to their Canadian counterparts and especially relative to Wall Street. When the pay on Wall Street is multiples of that being paid out at U.S. public pension funds, there is a problem. There will always be a discrepancy but the magnitude of that discrepancy reflects the values society places on public pensions. America needs to wake up and start paying public pension fund managers a hell of a lot better.

Finally, to their credit, CalPERS and CalSTRS are both leading the charge against excessive compensation for corporate executives at companies in which they invest with. Their latest target is Oracle's CEO, Larry Ellison, one of the richest people in the world. Aiesha Mastagni, Investment Officer at CalSTRS, the fund's point person on corporate governance and executive compensation, discussed this issue in an exclusive interview with Talking Numbers, saying there's more to this fight than just compensation:
"I think it's a multiple of issues here," says Mastagni. "It's the way the compensation's structure, it's the magnitude of pay, and, quite frankly, it's the fact that Oracle's performance really hasn't justified the outsized pay that they've given Mr. Ellison."
I'd be buying Oracle (ORCL) shares at these levels but prefer the price action on Microsoft (MSFT), which is making new highs. Is Larry Ellison overcompensated? DOH!!!