CalPERS’ Weighing Changes to Comp Program

By David G. Barry


The board of the California Public Employees’ Retirement System (CalPERS) is weighing changes to the system’s compensation program aimed at making it more competitive in attracting and retaining employees.

In information presented to the board’s Performance, Compensation & Talent Management Committee in February and April, compensation consultant Global Governance Advisors suggested that the $500 billion system broaden its peer group to include larger private sector firms, create salary packages that are more incentive laden, and put in place reviews that are more “objectively based.”

GGA is now working with CalPERS’ human resources team to rework the system’s compensation policies, with the aim of having the board consider it in June. The efforts are specifically focused on executive positions – including chief executive officer, chief financial officer, general counsel – and investment positions, such as chief investment officer, deputy chief investment officer, managing investment director, investment director and investment manager.

In his April presentation, Brad Kelly, a partner with GGA, stressed to CalPERS’ board members that it’s important for the system’s compensation program to evolve.

“Complacency is the kiss of death for any organization, especially public pensions in an environment like this,” he said.

When looking at compensation practices, it is important that public pension funds look beyond the status quo and focus on the “market trends” that are going to make it an “employer of choice” for top talent, Kelly added.

CalPERS, according to a State of California careers site, is currently looking to fill 30 positions, including at least eight on the investment side. Additionally, Institutional Investor reported that another CalPERS investment manager, Matt Cole, is joining Strive Asset Management, an upstart asset management firm.

A CalPERS’ spokeswoman was unable to provide data on how those numbers compare historically.
News of CalPERS’ efforts, though, comes as other public pension funds are struggling to fill positions, especially on the investment side.

The $201 billion Teacher Retirement System of Texas, for example, is currently recruiting for 28 investment positions – 24 due to vacancies – according to remarks made at the system’s April investment committee by CIO Jase Aubry.

“We’ve experienced a full year’s worth of turnover in just the first quarter,” he said.

Likewise, the $83.4 billion Alaska Permanent Fund Corp. was as of late April seeking to fill 10 of its 60 full-time positions, including CEO, chief operating officer and three investment-related positions. And the $78.3 billion Los Angeles County Employees Retirement Association has 101 openings out of 508 budgeted positions – including 11 in its investment division.

In his remarks, Kelly said the so-called Great Resignation – the term used to describe the sizable number of people who’ve left their jobs over the past two years – is not specific to the private sector or the public sector. It is an issue, he said, which is affecting all industries, with companies expecting as much as 50% greater turnover.

That being said, public pension funds are certainly feeling the impact of what’s transpired over the past two years.

“Public pension plans are struggling in the recruitment of investment talent as a result of the pandemic,” said Michael Kennedy, a senior client partner with recruitment firm Korn Ferry. “Candidates are more reluctant to relocate for the opportunity and are looking more for virtual or hybrid opportunities. Many public plans are still requiring either in-person roles or potential hybrid structures. The compensation has not changed to make these transitions more attractive for public funds. As a result, this has limited the pool of top investment talent compared to three years ago.”

Dan Cummings, executive vice president and Denver managing director for recruitment firm EFL Associates, said pension funds are clearly dealing with a “talent shortage” – an issue he says may be “more acute because young people don’t necessarily think about public funds when they’re considering their job prospects as graduation nears.”

Public pension funds, he said, “have to be much more proactive about making young people aware of the opportunities in the public sector.”

Whether CalPERS’ reworked compensation program will lure more young people remains to be seen. But given its outsized role in the investment community, there is certainly a possibility that what CalPERS’ ultimately implements could serve as a guide for other public pension funds.

The findings of a study done for CalPERS showed that the salaries paid to its CEO and general counsel as well as most of the investment positions are competitive with the salaries paid to people in those positions at similarly sized pension funds. However, CalPERS’ pay packages for both executives and investment personnel lag against those of their peers when it comes to total cash compensation, which is salary plus an annual incentive, and total compensation, which is comprised of salary, annual incentive, and long-term incentive.

According to the data, CalPERS’ CIO receives 43% less in total compensation than the so-called market rate for other CIOs in the peer group. And in fact, other than the investment manager position, the other investment roles all lagged their peers by between 19% and 27%.

Peter Landers, a senior partner with GGA, said in a February presentation that a key reason why there may be “some gap” between CalPERS and the marketplace is that “more and more pension funds are getting more comfortable with at-risk incentive pay,” i.e., long-term incentives.

In its presentations, GGA stressed that such pay structures are something CalPERS should give thought to, with at least some of those incentives – whether annually or long-term – tied to the performance of the overall fund.

“You have to have that right level of talent in place to ensure that the fund hits that 7% return,” said Kelly, Landers’ GGA colleague.

One way to do that, he said, is have to an annual incentive plan that focuses on “total fund results.”
In leading up to the meeting in April, GGA proposed that CalPERS conduct compensation assessment surveys every two years, expand the size of its peers from the current $305 billion to half to two times CalPERS’ assets under management in order to get an accurate comparison, and it puts in place an expanded grading scale.

All of these steps, said Kelly, are aimed at getting the best people to join and stay at CalPERS.

The investment team, he said, is not only competing against other public pension funds, but is “competing against the BlackRocks of the world. When you are going after an asset, there are thousands of funds out there, public and private, going after the same asset. The opportunity doesn’t play favors. You need to find a way as opportunistic and competitive as you can to protect that pension promise for your members.”