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New method for incentive compensation at CalPERS

Joe DearCalPERS is contemplating an incentive schedule for senior investment executives that builds in downside risk, by expanding the range of the factor multipliers for the quantitative elements of investment performance plans, a move which could potentially eliminate a small compensation incentive award.


Staff were asked to present sample data reflecting an incentive schedule for demonstration purposes at the August performance and compensation committee, for the quantitative elements of investment performance plans that would build in downside risk by expanding the range from the existing 0 to 1.5 to -1.0 to 2.5.

Michael Schlachter, managing director of Wilshire, presented projected estimated changes in the incentive compensation if the factor multipliers were changed, based on December 2008 performance.

The analysis, which looked at expanded ranges of -1.0 to 2.5, and -2.0 to 3.5, showed that a small incentive compensation award under the current methodology would be eliminated under the expansion of the ranges, for the chief investment officer and investment staff.

For some staff, including asset allocation, risk management, AIM, and fixed income portfolio managers, the new ranges would result in a negative award, because of the structure of their incentive program.

However these changes would only effect the quantitative element of the incentive program, which makes up 75 per cent for most investment staff.

The chief investment officer, Joe Dear, is awarded incentive compensation based on 25 per cent leadership factors (qualitative) with the remaining 75 per cent quantitatively based on the performance over a designated benchmark of the total fund (40 per cent) and each of the five major investment divisions (7 per cent each).

In minutes of the performance and compensation committee, chief of the human resources division, Chris O’Brien recommended approving the second reading of the performance plans for the 2009-2010 fiscal year for the chief investment officer, chief operating investment officer, senior investment officers, senior portfolio managers and portfolio managers.

Under goal IV of CalPERS’ strategic plan, the organisation is dedicated to effectively utilising its resources, including a diverse, creative, motivated, high performance workplace. This can be accomplished at the highest executive levels through the establishment of methods that provide broad flexibility in the recruitment, retention and compensation of key personnel.

Wilshire is in the process of calculating actual fiscal year 2009 incentive compensation.

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