By Mark
Niquette and Martin Z. Braun
Britt Harris arrived at the
Teacher Retirement System of Texas in 2006 from the world’s
biggest hedge fund with a mandate to improve the pension’s performance. He also
brought a Wall Street attitude about pay.
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.
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.
America's Great State Payroll
Giveaway: Read
Bloomberg's full reporting on how out-of-control pay burdens states around the
country.
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.”
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