NY CIO: Fix Public Fund Compensation—Or We May Fail

Milken Asset Owners1 Two of America’s most powerful public fund CIOs laid bare the potential consequences of a “broken” staff compensation system at the Milken Institute Global Conference.

“If it doesn’t get fixed, no, you won’t meet the target rates of return. You won’t have the talent,” said Vicki Fuller, CIO of the $185 billion New York State Common Retirement Fund.

On a $1 billion private equity mandate, for example, New York’s fund might spend $30 million to $50 million in fees per year. The employee responsible for that mandate? “$150,000,” Fuller pointed out. “It doesn’t make sense.”

The net investment of increasing staff wages to effectively manage assets in-house would be paid off many times over, according to panelist Chris Ailman, CIO of California’s $187 billion teachers’ retirement system. He knows from experience.

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“In the public markets, it costs us about one-tenth the cost to run money in-house as it does to hire an external manager,” Ailman said. “If we could run money in private markets and do direct deals, it would probably be 25 times cheaper.”

Ailman and Fuller lauded Canadian pension funds for solving the issue through arm’s-length governance structures and market-competitive wages.

Ron Mock, CEO of Ontario Teachers’ Pension Plan, earned C$4.3 million (US$3.4 million) in 2015, for example. His predecessor took home double that in 2013. At $133 billion, the fund has among the best long-term track records of any pension investor worldwide, net of expenses.

Chris Ailman’s compensation totaled $675,000 in 2014, according to public records. New York State paid Fuller approximately half that to oversee the equivalent of New Zealand’s GDP.

Neither Ailman nor Fuller mentioned their own pay during the discussion. Rather, they raised alarm on behalf of their teams and members.

“I actually believe in calling this out, being transparent, and letting our pensioners know what the implication is,” Fuller said. “In order for all of us—for the welfare of the millions of people we serve—to be able to provide that secure pension in a defined benefit form in perpetuity, we’re going to have to fix this.”

The Railways Pension Scheme (Railpen) has asked the board of Reckitt Benckiser to address “material risks” to the company’s performance.

Railpen, a long-term shareholder in the UK-based consumer goods company, said it had “significant concerns” about the quality of Reckitt Benckiser’s board governance at the company’s annual meeting Thursday.

“We want to invest the capital of our beneficiaries in companies that provide long-term sustainable returns and consider corporate governance to be of paramount importance to us as long-term shareholders,” said Deborah Gilshan, Railpen’s head of sustainable ownership.

Though Gilshan said she believed Reckitt Benckiser had “strong fundamentals,” she raised concerns about the board structure. In particular, she pointed to Remuneration Committee Chair Judith Sprieser, who is seeking reelection after 12 years on the board, despite previous indications that she would step down from her role.

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“We are not opposed to longer-serving directors per se; it is also about their effectiveness,” Gilshan said. “In Ms. Sprieser’s case, we have been underwhelmed by her stewardship and oversight on remuneration.”

For example, the new remuneration policy, which the £22 billion ($31.8 billion) Railpen voted against Thursday, failed to address the pension fund’s concerns about short-termism.

“We support remuneration structures that deliver pay outcomes commensurate with long-term performance but we have long held concerns that such a structure does not exist at Reckitt Benckiser,” Gilshan said. “So-called long-term incentive awards become payable immediately after only a three-year performance period.”

Questioning the “logic of the remuneration committee in determining the appropriate level of pay to motivate and incentivize the CEO,” Railpen voted against the reelection of members of the committee, including Sprieser and company Chairman Adrian Bellamy.

Meanwhile, the California Public Employees’ Retirement System (CalPERS) and other Rio Tinto shareholders voted “overwhelmingly” in favor of the $290 billion pension’s climate risk reporting proposal.

The resolution included emissions management and low-carbon energy research.

“Rio Tinto joins the growing number of global companies agreeing to provide investors with risk reporting on climate change,” said Anne Simpson, CalPERS investment director of global governance. “You can’t manage what you can’t measure, so new risk reporting is vital.”