The Teacher Retirement System of Texas has reviewed the benchmarks it used to calculate investment staff compensation after concerns were raised over the level of bonuses it paid to senior staff earlier in the year.
TRS in the past has been progressive on addressing appropriate incentive pay with chief investment officer Britt Harris (pictured) previously voluntarily giving up $167,935 in performance incentives when TRS lost 27 per cent in 2008.
The report by consultants Hewitt EnnisKnupp and handed down to the fund’s August meeting of the compensation committee looked at a range of benchmarks TRS uses to calculate incentives for staff.
Analysts found benchmarks used for both performance and peer comparison were in line with industry norms.
“The benchmarks articulated in the TRS IPS (and therefore the Performance Incentive Pay Plan) are, in our opinion, appropriate and satisfy the commonly-accepted criteria for an effective performance benchmark,” the report’s authors said.
The moves come after concerns were raised in the Texas legislature about incentive compensation.
The fund recently faced claims in The Dallas Morning News that this year more than $8.2 million in bonuses had been paid to investment managers in the face of cuts to teacher wages and benefits in Texas.
A recent board decision modified the fund’s incentive payment plan to allow for bonuses to be deferred if the fund experiences a negative returns year.
In its June meeting Harris told the compensation committee that investment staff would only be eligible for incentive compensation if the investment performance exceeds the benchmark or the fund is ranked in the top half of it peer group.
Once these requirements were met, he said the qualitative factors would then be incorporated. These qualitative factors are based on peer review on the performance of each member on a range of factors including team work, innovation, process management and quality control.
The Hewitt EnnisKnupp report lists qualitative factors as having a 20 per cent weighting in calculating total incentives, with “immediate leaders’ and superiors’ ratings more heavily weighted”.
The report states that performance benchmarks are reviewed annually and that public market benchmarks had been “tweaked” in the previous years.
This included replacing the Russell indices with the MSCI indices for US equities, to make them more compatible with the benchmarks used for non-US indices.
It said private market benchmarks were appropriate but said benchmarks for real estate and hedge funds should be part of an upcoming review of policy.
It is understood a review of investment policy is currently underway and will take place in September.
The peer component has a 30 per cent weighting and uses the Trust Universe Comparison Services (TUCS) for comparison.
For incentives the total trust return must exceed median return for funds greater than $10 billion in the TUCS universe.
Internal public and external public peer incentives are calculated on the same TUCS returns and benchmarks. The alpha target is 100 basis points.
Private equity return must exceed median return for private equity accounts greater than $1 billion, with an alpha target of 300 basis points.
Real asset returns must exceed the median return for real estate accounts greater than $1 billion, with an alpha target for real assets of 250 basis points.
The report says the development and calculation of the fund’s performance incentive pay plan is independent.