Ohio suspends incentive pay for investment staff

The investment department of the $56 billion State Teachers Retirement System of Ohio (STRSOH) will defer
the $3.39 million earned in performance-based incentive pay to future fiscal years conditional on certain hurdles, and a compensation study for investment associates will be completed by November.

At its September meeting the board voted not to pay the earned $3.39 million in PBIs for fiscal year 2009 the following year, but instead, defer their payment as well as spread the payment over future fiscal years.

One-half of the payment, or about $1.7 million, will be paid only when investment assets total $60 billion or higher at the fiscal year-end; and the total investment fund has a positive return. But it can’t be made before July 1, 2010.

The remaining $1.7 million in PBIs can only be paid when investment assets total $65 billion or more at the end of the fiscal year; and the total fund has a positive return. This second payment cannot be made until at least July 1, 2011.

As of August 31, 2009, STRS Ohio’s total investment fund has a preliminary market value of $56.8 billion.

PBI payments are calculated on the performance of various portfolios and asset classes against their respective benchmarks for multiple-year periods, total fund performance and absolute return.

While the value of STRS Ohio’s investment fund has dropped significantly during the recession, the net value added from active management over the total fund benchmark return for the time period of July 1, 2004, through June 30, 2009, was more than $1 billion.

This means that investment assets were higher at June 30, 2009, by $1 billion than if STRS Ohio had invested only in index funds. This number takes into account all direct investment costs, including earned PBIs, during that period. The benchmark annualised rate of return over the five-year period was 2.30 per cent; the return on STRS Ohio’s total investment fund was 2.69 per cent.

The board reports that the total compensation – base pay plus maximum PBI – for most of STRS Ohio’s investment department is targeted at the bottom 25th percentile of total compensation levels in the private market.

It believes that the fund benefits from the lower cost of internal management compared to paying fees to external
money managers, with estimated savings from internal management totalling more than $100 million in calendar year 2007 alone.

The compensation study will look at public and private sector data and will include a recommendation for
the mix and amount of base pay versus variable pay for all professional investment department positions.