"Say on Pay" for Public Pension Funds
What's good for the goose is good for the gander.
My mother taught me as a five-year-old that I should "sweep my own doorstep first" before I light into somebody else's faults. That would be a good rule for public pension plan officials to follow, particularly when it comes to the rhetoric they've used as proxy activists for corporate governance. There's a disparity between their own internal governance practices and what they tell companies whose shares they own about how to govern the firm and pay the top executives.
A number of public pension funds have begun expressing their "Say on Pay," which the Dodd-Frank Act now requires for large corporations. Say on Pay gives shareholders a vote on executive compensation at least every three years. Paradoxically, the financial performance of many public pension funds in the past decade has been downright dismal and deserves equal attention from stakeholders. If these were private companies, their stock market prices would be running a course similar to what happened to many of the banks and Wall Street brokerage houses in recent years.
State and local taxpayers are now stuck with unfunded pension liabilities of at least $750 billion dollars — equivalent in size to the federal TARP bailouts for private companies. Nobody dreams that the pension funds will repay taxpayers for their additional make-whole contributions — in effect, bailouts — as have many private firms that received TARP money. If you count the state and municipal failure to fund retiree medical benefits plans, the numbers exceed $2 trillion. Much of this is the result of faulty legislation and benefits giveaways for which pension officials can't be blamed. But a significant component of the underperformance requires public accountability.
So where is the "Say on Pay" that taxpayers should be entitled to express regarding the financial underperformance of pension officials, their consultants and actuaries, and the state legislators who got us into this mess? Shouldn't there be a method for the public to express equivalent outrage along the lines of shareholder votes on high-paid corporate executives?
I'm not here to defend corrupt corporate practices or outrageous CEO pay packages. Corporate shareholders including pension funds have every right to protect the market value of their holdings if management is wasting their money and company boards are self-serving. That is what proxies are for. Institutional investors and their money managers have a fiduciary obligation to monitor governance and management. I personally implemented Sarbanes-Oxley requirements to reform corporate accountability and manage company risks more prudently twice at prior points in my career, and I support most of the "two-page reforms" of the Dodd-Frank laws. The new Say on Pay rule is a legitimate requirement, giving investors a voice in compensation that compels corporate boards to think more deeply about shareholder and civic interests. It's non-binding, but it's a wake-up call for insiders, as Citigroup's CEO learned recently.
I support better compensation for strong-performing public pension managers — when they get it right. Taxpayers would be better served if the good ones are rewarded to stay in public service, rather than heading off to the happy hunting ground of private employment. Further, I would like to see the entire industry use symmetrical performance-based investment management and consultant fees. Performance-based compensation rewards genuine outperformance and requires a serious pay cut for lackluster results and even worse for failure. A symmetrical plan makes the downside as painful as the upside is joyous. That would deliver a strong message when mistakes are made, while helping to keep the best talent working for taxpayers' benefit. Nobody should be punished every time the stock market goes down, or rewarded just for market ebullience. But failure to design the investment, benefits and funding plans to mitigate the risks of a six-sigma decline should be penalized financially from the top down.
It's fanciful to expect legislators to give voters a say on politicians' pay. Taken to extremes, plebiscite democracy would create its own can of worms in the public compensation world and scare away talent. But I'd like to avoid double standards and encourage pension boards to look in the mirror first when they talk about governance and compensation reform. Start by giving pension-ineligible local officials — as taxpayer representatives and bill-payers — an advisory say on the pay of their state pension fund managers. What's good for the goose should be good for the gander.
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