CALPERS and The Murky CSR Issue of Executive Pay

This morning I read an AP piece in the Huffington Post about compensation at the pension fund CALPERS and thought it worthy of a special post on what I consider to be one of the murkier corners of CSR.  Basically, the article described CALPERS officers walking away with bonuses despite the fund losing money this year.  While balanced to a point, it would be more than possible to walk away from reading the AP article thinking that CALPERS was doing something egregious.  As is often the case, however, the issue is less cut-and-dry than it may seem based on how the article was written.

Backing up to offer some context for this discussion, the California pension fund CALPERS has long been on the forefront of CSR, incorporating ESG factors into how it invests the funds it guards on behalf of its state’s employees.  This makes today’s article all the more notable for what on the surface could be perceived as hypocrisy coming from an organization which has historically placed strong emphasis on values-based investment.

Hypocritical or not, executive pay is messy from a CSR standpoint, as I learned in an endowment course I took in business school.  There are many ways to skin a cat, and likewise, there are many ways to look at what constitutes a sound approach to executive pay for endowments and pension funds.  Here are a few conflicting takes that illustrate the wide range of perspectives that one could take on today’s CALPERS article.

The Time Horizon Debate

*CALPERS did wrong.  Its pension fund employees did well for themselves in the face of a really bad year for the people whose money they steard.

*CALPERS did right.  Pension fund employees need to be compensated for long-term results rather than short-term success.  Therefore, because CALPERS has done well over a five-year time horizon, the bonus structures in place were appropriate.

The Overall Performance vs. Benchmark Debate

*CALPERS did wrong.  Pension officers are hired to make money for the people whose investments they steward.  Therefore, CALPERS failed the state’s employees when it offered bonuses during a year when pension officers have lost a significant amount of their money.

*CALPERS did right.  Pension officers are hired to make sure that the money they guard for their investors performs better than it would in the hands of other investment managers.  Therefore, CALPERS employees met expectations by staying consistent with benchmarks (it was a bad year for everybody!).

The Incentive Debate

*CALPERS did wrong. Pension funds should hire officers who are motivated by a sense of purpose rather than by fat bonuses.

*CALPERS did right. Pension fund officers make sacrifices by choosing the public sector over the more lucrative private sector.  Therefore, it would be impossible to hire good people without promising bonuses.

What does all this have to do with CSR?  For one thing, some might consider it fishy to see a pension fund that has argued for responsible executive pay being liberal with its own compensation. More broadly, however, I would argue that many of the issues at play in the pension fund compensation debate echo executive pay issues we see in the private sector.  Indeed, when voting on bonus structures, boards often have to face similar pressures to balance the interests of stakeholders with a variety of perspectives.  But is designing an executive pay policy somehow simpler in the private sector?

Photo credit: renaissancechambara