Paying for Performance in Public Pension Plans

Abstract

We examine the relation between public pension plan CIO compensation and plans’ investment performance. Higher paid CIOs outperform their counterparts by 25 – 47 bps per year. This outperformance generates an additional $108.58 – 201.59 million for these plans. Plans offering higher compensation hire better educated CIOs and are more likely to retain their CIOs. Higher CIO compensation is positively correlated with the use of incentive compensation, but incentive compensation does not appear to directly affect performance. Our results suggest that higher compensation leads to better investment performance and that plans may be using incentive compensation to justify paying their CIOs more.