Harris, the Texas fund’s chief investment officer, made $1 million last
year in salary and bonuses, the most of any public pension employee in the 12
most populous U.S. states, according to data compiled by Bloomberg. Four other
employees made at least $500,000, and the fund paid $9.7 million in bonuses in
2011, more than any in those states.
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Funds where executives made far less posted better investment results than
those produced by Harris and his staff over three and five years. They included,
respectively, the Ohio Police & Fire Pension Fund, where the top-paid
executive last year was William J. Estabrook, at $231,614, and the New Jersey
Division of Investment, where director Timothy Walsh made $185,000 plus $7,500
for moving expenses, data show.
“These guys may claim to be worth their weight in gold,” said Edward
Siedle, a former U.S. Securities and Exchange Commission attorney and president
of Benchmark Financial Services of Ocean Ridge, Florida. “They absolutely can’t
justify it.”
Falling Behind
While Harris says public pension compensation must be competitive with the
private sector to attract top talent, the Texas fund -- seventh-largest in the
U.S. with $112.4 billion in assets -- is falling further behind in long-term
obligations to more than 1.3 million education employees and retired teachers,
including Harris’s mother. The pay-and-performance disparities at public pension
funds are among the findings of a data review in which Bloomberg compiled
payroll records for 1.4 million employees of the 12 largest states.
Of the highest-paid pension executives in those states last year, all but
two worked at the Texas fund or the State Teachers Retirement System of Ohio,
data show. Yet the Texas fund’s 2.12 percent return over five years as of June
30, 2012, net of fees, was less than five other state pensions, including the
New Jersey pension plan, which returned 2.46 percent. The Texas fund’s
three-year results of 13.17 percent trailed Ohio Police & Fire, which
returned 13.25 percent.
Harris, who became chief investment officer in December 2006, was hired by
a board of trustees appointed by the governor. He said it isn’t fair to judge
his returns before 2009. It’s only since then that his strategy has been
completely in place after attracting the investment talent he needs, Harris
said.
‘Come Home’
“You get a better car, then you’ve got to have a good driver,” Harris said
in an interview. “This whole structure has been like a magnet to all these
investors from around the country to kind of come home to momma, come home and
serve the teachers.”
The Texas fund’s three-year return was just ahead of the State Universities
Retirement System of Illinois and the Pennsylvania Public School Employees’
Retirement System. Their top-paid executives earned $221,346 and $269,302,
respectively, the data show. Neither fund pays bonuses.
“Strictly looking at performance for pay, there are a lot of people who are
paid only mediocre salaries that deliver excellent performance,” said Charles
Skorina, an executive recruiter retained by the boards of institutional
investors to identify and hire investment professionals.
‘Loose’ Correlation
He found “a very loose correlation between pay and performance in public
plans,” based on an analysis of the pay of chief investment officers and pension
returns over five years.
The Texas teachers’ pension plan was 81.9 percent funded as of Aug. 31,
down from 82.7 percent funded in 2011, 82.9 percent in 2010 and 83.1 percent in
2009. These percentages show how much money the fund projects it will have
compared with its obligations to retirees over the long term. When a fund falls
further behind on them, taxpayers have to make up the difference. The U.S.
median for states fell to 71.7 percent in 2011 from 82.6 percent in 2007,
according to data compiled by Bloomberg.
While retired teachers in Texas don’t oppose bonuses to keep good staff,
they think the payments are too high and reward too many employees, said Tim
Lee, executive director of the Texas Retired Teachers Association in Austin.
“They don’t like the fact that people are getting bonuses and raises but
our retirees haven’t had a raise for 12 years,” Lee said in a telephone
interview. “If we are the best, then we must perform better than anybody else.”
Pay, Bonuses
Harris’s compensation included $480,000 in annual pay plus $565,792 in
bonuses earned in 2009 and 2010, according to the pension. He is scheduled to
make $900,752 in 2012, including his annual salary, plus bonus amounts of
$222,277 and $198,475 earned in 2010 and 2011, the fund said.
Harris, 54, joined the Texas system after managing the pension fund at
Verizon Communications Inc. (VZ) and six months as chief executive officer at
Bridgewater Associates LP, the world’s biggest hedge fund, based in Westport,
Connecticut.
He was hired to improve a fund with below-average performance that was not
well diversified, Harris said. With approval from the state legislature, Harris
began ramping up stakes in so-called alternative assets including private equity
and hedge funds. Alternatives have risen to 32.1 percent of assets from 4.1
percent in 2006, according to the fund.
Attracting Talent
Harris said he also sought to attract investment talent appropriate for one
of the world’s 20 largest pensions. That, he said, addresses the “travesty” and
“sin” of a public pension fund paying less to an investment staff working for
retirees than private-sector managers earn at smaller funds serving affluent
clients.
Standing at a white board in front of the conference table in his Austin
office, with a panoramic view of the Texas Statehouse, Harris drew a diagram
showing the scale of investment compensation at all pension funds, public and
private.
“These people right here are being cheated,” he said, pointing to public
funds at the bottom.
“It’s crazy to think about the fact that the way the world works is the
largest, most important funds are expected to compensate people the worst,”
Harris said.
After hiring a consultant to complete a comprehensive review of pay, Harris
said he increased base salaries to the top quarter of public funds and bonuses
to match the bottom 25 percent of private funds.
Incentive Changes
He changed the incentive program, which had paid bonuses of as much as 75
percent of base salaries only to investment directors, managers and executives.
Awards now range from as much as 5 percent of base salary for administrative
staff to as much as 125 percent for top officials. Bonuses are paid over two
years, as long as an employee remains with the system.
Bonus pay at the fund increased from $622,918 for 34 employees in 2007 to
$9.7 million for 108 in 2011, which included incentives earned in 2008, 2009 and
2010 and paid last year when the fund reached positive returns, according to
records provided by fund. This year, Texas Teachers paid $6.1 million in
incentives and expects to pay $6.9 million in February, records show.
With bonuses, 63 of the fund’s employees, or about 10 percent, made more
than Republican Texas Governor Rick Perry’s $150,000 annual salary without his
state pension last year, data show.
Good Stewards
The Texas Teachers Board of Trustees has a duty to act in the best
interests of the people they serve while being good stewards of taxpayer
dollars, said Josh Havens, a spokesman for Perry.
“Governor Perry expects the board to do its job,” Havens said in an e-mail.
The pension with the next-highest bonuses, State Teachers Retirement System
of Ohio, paid $8.1 million to 88 workers last year, data show. That included
$3.1 million in bonuses earned in 2009 but deferred until the pension reached
$65 billion in assets last year, the fund said.
The California Public Employees’ Retirement System, the largest public
pension in the U.S., paid $4.1 million to 50 workers in 2011, the fund said.
By comparison, the three highest-performing funds over the past 10 years,
the Pennsylvania School Employees Retirement System, Ohio Police & Fire
Pension Fund and Pennsylvania State Employees’ Retirement System, didn’t have an
employee paid more than $270,000, and none pays bonuses, the funds said.
Since Harris joined the Texas fund in December 2006, Texas Teachers has
paid $20 million in bonuses, records show.
‘Go Along’
A 2009 memo submitted to the Texas system’s board of trustees by Michael
Green, one of the fund’s former senior managers, said Harris’ approach to
running the system can be summarized in two phrases: “You’re too skeptical” and
“You’ve got to go along to get along.” Reached by telephone, Green declined
comment other than to say he stands by the memo.
While Harris said he can’t comment because Green is a former employee, he
said, “I don’t need to get along with anybody” and “this is a job that I want to
be in, not that I have to be in.”
Top public pension fund executives make less than their counterparts at
investment-management companies. Compared with the $1 million Texas system paid
Harris last year, Waddell & Reed Financial Inc. (WDR), with $95 billion now
under management, paid Michael Avery, its president and chief investment officer
in 2011, total compensation of $4.6 million that year, according to the Overland
Park, Kansas-based company’s proxy statement.
Bonuses Falling
Yet bonuses are falling for money managers in the private sector. Wall
Street’s cash bonus pool is likely to fall for a second straight year in 2012 as
the financial industry grapples with market turmoil, economic weakness and new
rules, New York state Comptroller Thomas DiNapoli said.
The average Wall Street bonus fell 13 percent to $121,150 in 2011, the
lowest since 2008, and down almost 40 percent from a peak of $191,360 in 2006,
according to estimates by DiNapoli.
Harris didn’t take an estimated bonus of $167,835 in 2009 after the TRS
fund experienced a 27 percent drop in its market value in 2008. The fund pays
bonuses even if the fund loses money -- deferring the payments until returns are
positive again -- as long as employees beat their investment benchmarks,
according to the plan.
Core Culture
Under Texas Teachers’ program, bonuses are calculated based 80 percent on
investment performance against asset-class benchmarks and peer groups, with 20
percent based on how each employee rates against “core culture items” of candor,
curiosity, accountability, teamwork and leadership, and promoting a constructive
work environment, said Susan Wade, director of professional development.
Lee at the Texas Retired Teachers Association sent a letter to board
trustees in June seeking to lower the amount of bonuses employees are eligible
to earn, to raise the benchmarks used to qualify for a bonus and to limit the
number of workers who qualify. The board didn’t agree, said Lee, the
association’s executive director.
Among large, statewide pension plans, about one-quarter to a third have
some sort of performance incentive program for their investment staff, said
Keith Brainard, research director at the National Association of State
Retirement Administrators.
Anecdotal Reports
Brainard said he hears growing anecdotal reports about retirement funds
having difficulty attracting and retaining qualified investment staff, and that
Harris and many asset managers could easily double or triple their compensation
in the private sector. If they were working for an external money manager, most
people wouldn’t be concerned, he said.
About 80 percent of the Ohio teachers’ $65
billion fund is managed internally by about 100 investment professionals, said
Stephen Mitchell, deputy executive director of investments.
That includes Mary Ellen
Grant, the fund’s highest-paid employee last year at $678,291. She
oversees a staff of 35 that handles almost 90 percent of its real estate
holdings, while other funds rely on more expensive external managers, spokesman
Nick Treneff said. The fund’s three-year return on investments, net of fees, was
12.40 percent and its five-year return was 0.97 percent.
While relying on internal staff can inflate compensation totals, it’s more
cost effective than paying external managers, Mitchell said in an interview in
Columbus. He said an analysis by CEM Benchmarking concluded the Ohio Teachers’
fund saved $91 million in 2011 alone by managing assets internally compared with
peer median costs to use external managers.
“Our costs are very low for what we do,” Mitchell said.
No Guarantee
Even so, there’s no guarantee that active management and higher
compensation will produce better results, and funds can get competitive returns
with passive management using external managers, said William Mabe, head of the
State Universities Retirement System of Illinois. Mabe earned less than a third
of what Grant was paid in 2011 and a quarter of what Harris made.
Mabe’s fund posted returns that ranked third-best among 20 funds in the 12
largest states over three years and 8th highest over five years, while Mabe’s
compensation was lower than that of the top executives of all but three of the
20 plans.
“At the end of the day,” Mabe said in a telephone interview, “returns are
really what matter.”
(Click image to enlarge)
Caption: Dec. 13 (Bloomberg) -- Britt Harris, chief investment officer of
the Teacher Retirement System of Texas, talked with Bloomberg's Mark Niquette
about the fund's performance and employee compensation. In 2011, Harris earned
$1 million in salary and bonuses and four of his staff members earned at least
$500,000. Returns over three, five and 10 years trailed those at funds including
the State University Retirement System of Illinois, and the New Jersey Division
of Investment and retired teachers haven't had a raise in a decade. Harris says
pay must be competitive with the private sector to attract top investment
talent, and the fund is heading in the right direction with the system he put in
place. Harris spoke on Oct. 19 in Austin, Texas. (Source: Bloomberg)
Public Pension Fund Compensation Ranks at the Top
State pension funds that pay their executives the most don’t always produce
the best investment results, according to data compiled by Bloomberg that
includes 1.4 million payroll records for employees of the 12 largest U.S.
states. Pension-fund officials were the highest-paid non-university employees in
states including Texas, Ohio, Virginia and Georgia, the data show.
To read more, click
here.
(Click images to enlarge)
