Friday, February 03, 2012 12:45:43 PM
Ambachtsheer: Pension Fund Manager Compensation Should Be Reevaluated
The most difficult part is the design of an effective pay-for-performance scheme in the investment function, writes Keith Ambachtsheer from the University of Toronto.
(February 3, 2012) -- Remuneration for pension fund managers has come under the spotlight as investors have taken aim over investment banking pay, according to a paper published by Keith Ambachtsheer at the University of Toronto's Joseph L. Rotman School of Management.
While much attention in compensation strategy is focused on how pension funds should exercise their say on pay responsibilities as investors in the corporate sector, little has been written on how pension funds should pay their own people, according to the newly released whitepaper.
The most difficult part of the corporate say-on-pay debate and the internal compensation question for pension funds is the design of an effective pay-for-performance scheme in the investment function, the paper by Ambachtsheer concludes.
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The paper outlines six key questions around which a pay-for performance program could be built when the real markets path is chosen:
1) What does it mean to invest productively?
2) What does it mean to administrate effectively?
3) What does it mean to advise wisely?
4) How well does our governance process work?
5) Are we using our scale to maximum advantage?
6) Are we attracting and retaining the right people?
With the average tenure for public pension chief investment officers being between three and five years, the compensation constraints in the public arena are not going away anytime soon, CIOs say. Last month, a study by Charles Skorina, an executive search consultant, revealed a performance-for-pay ranking -- aiming to determine performance for pay by looking at the investment returns of CIOs over the most recent five years, computing how many basis points they earned per $100,000 of compensation, and then ranking them all by that measure of performance-for-pay. In Skorina's latest newsletter, the study showed that Jane Mendillo of Harvard's endowment, along with her popular CIO counterpart David Swensen of Yale University, ranked highest on Skorina's list when looking purely at pay. Yet when ranking by performance-for-pay, the two CIO honchos stood at the bottom of the list -- with Swensen in 46th place and Mendillo in 48th place, out of a total of 50 spots.
While Skorina noted that at least some CIOs deserve their pay because they produce consistently better returns than their peers, he continued: "Talent, in the final analysis, is a commodity in the market like any other. Employers have limited resources; they want the best talent they can find, but at a price they're willing to pay."
Read the paper "How Should Pension Funds Pay Their Own People?" here.