Bonuses Survive Abysmal Performance At CalPERS

It would be easy to go ballistic over this article from CNBC on bonus payments at CalPERS.

As its investment portfolio was losing nearly a quarter of its value, the country’s largest public pension fund doled out six-figure bonuses and substantial raises to its top employees, an analysis by The Associated Press has found.

Board member Tony Olivera said the California Public Employees’ Retirement System tried to reduce the bonuses but was under contractual obligations to pay them.

CalPERS’ plunging value came as stock values tumbled around the world, the state’s economy suffered its worst decline in decades and basic state services faced severe budget cuts.

Virtually all of CalPERS’ investment managers were awarded bonuses of more than $10,000 each, with several earning bonuses of more than $100,000 during the 2008-09 fiscal year. The cash awards were distributed as the fund lost $59 billion.

CalPERS points out that bonuses were actually cut by more than 50% and in addition to the contractual requirement argument for paying bonuses notes that they try and tie incentive compensation to long-term performance in order to dissuade managers from focusing on short-term profits.

Though it hurts, I can see the logic of contracts that measure performance over the longer-term. This is the sort of regime that a lot of the critics of bank bonuses have been arguing in favor of. Here you see the apparent perverse result of incentive pay being granted in the midst of abysmal performance, but that’s the sort of outcome you would expect when you lengthen the time frame for measurement.

There are times, however, when you wonder just how badly someone needs to screw up in order not to get a bonus and more appropriately lose their job. Such would be the case with the real estate investment manager for CalPERS.

Real estate was the hardest-hit investment category in the CalPERS portfolio during the 2008-09 fiscal year, suffering from the same property devaluations felt across the country. That portfolio lost 47.9 percent of its value over the fiscal year.

CalPERS awarded the portfolio’s senior investment manager, Ted Eliopoulos, a $93,941 bonus on top of his $333,124 salary, which was 8 percent higher than the previous year. According to CalPERS’ annual report, the global equity portfolio saw a 26 percent decline in U.S. stocks and a 32.4 percent drop in international stocks during 2008-09.

At some point you have to throw your incentive plans out the window and admit to the fact that sometimes people just make a mess of their job and need to pay a price for doing so.

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