Penny Wise. Pound Poor.

Ashby Monk

This week the Boston Globe published an article shaming MassPRIM for paying a total of $267,000 in performance based bonuses. In other words, the 25 person team at MassPRIM was made to feel bad for accepting a little over 10 grand per person in annual performance compensation after the pension had its second best year ever. Seriously? In all honesty, I think articles like this one may actually do damage to our pension system’s long-term sustainability. Here you have a major newspaper calling on a $50 billion pension fund to pay its staff significantly below market levels. For some flavor, see this quote lifted from the article:

“For these highly paid individuals to have a payment scheme that gives them huge bonuses for their performance is totally outrageous. Obviously, they haven’t gone by Occupy Boston to see how people are feeling about how the rich are getting richer and the working families are struggling.’’

The author’s point is to say that Massachusetts’ pension fund employees make more money than other government employees, and paying them a bonus (despite the fund’s banner year) is totally unfair. What the author doesn’t mention is how much less the MassPRIM employees make than their peers in the private sector — i.e., how much they are actually giving up in terms of potential compensation to work for a mission-driven organization like MassPRIM. So, just for fun, I thought I’d actually follow through on this article’s logic and think about what would happen if MassPRIM started paying its employees even less than it already does (which is already a pittance compared to other pension funds in the US and Canada).

So let’s assume that all performance based compensation is cut and investment staff are paid well below $100,000 per year. Right away, it becomes extremely challenging for MassPRIM to hire talented investment professionals. Even the most mission-oriented individual would be hard pressed to work at MassPRIM when they could be making three or four times that much at another pension fund and possibly ten times that much in the private sector. So MassPRIM would quickly lose some of its most talented employees. As a result, the fund would not have the capability or even credibility to manage its assets in house (as many of its peers are doing to cut down on exorbitant fees paid to the private sector). Because of this, MassPRIM would be forced to rely on private sector asset managers almost entirely. So the question then is how much MassPRIM would end up paying these private sector asset managers in terms of annual bonuses. I can promise you that it’s more than $10k per person. In fact, in the private equity space, I’m sure some of the bonuses are 100 times that large. Is this preferable to paying in-house staff a competitive wage? No. No it’s not.

Anyway, I’m sorry for the rant. The author of this Boston Globe article undoubtedly has good intentions, but his argument will ultimately exacerbate the problems we see in finance today! (Rich getting richer etc.) As I see it, one of the big benefits of moving assets in-house is reducing costs and fees. But this really isn’t possible without a highly sophisticated in-house team of finance professionals. How are you going to hire these people without paying competitive salaries?

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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