Chief investment officers at U.S. public pension plans who receive higher compensation are more likely to generate higher returns and better manage costs and risks.
According to a recent research paper, CIOs of public pension plans who are paid in the top quartile are 8.6 percent more “efficient,” a theoretical measure based on investment returns, and the management of costs and risks, than those who are paid in the bottom quartile. The paper, which is written by Siegfried Anyomi, a PhD candidate in finance at the University of Iowa, is based on an analysis of the activities of 220 public pension plans in the U.S. between 2006 and 2018. In the sample, CIOs earn, on average, total compensation of $286,148, while those in the top decile earn significantly more — $548,459.
The paper’s author developed a framework to measure a pension plan’s efficiency based on investment returns, the costs for managing a pension plan, and how well a plan balances risk and return considerations. The three factors capture a plan’s ability to maximize returns, as well as its skills in cost management and risk control. Specifically, in terms of costs, the paper analyzes administrative expenses, investment fees, and the costs to manage benefit payments to plan beneficiaries. To analyze a plan’s risk management ability, the author includes factors, such as the plan’s net asset value and the ratio of active plan members to total members, which affect the level of risk that the plan can reasonably take.
“Increased pay and incentives for public pension plan chief investment officers are part of efforts to remain competitive and ensure the attraction and retention of talented executives in these roles,” Anyomi wrote in the paper. “Therefore, quantifying how CIOs allocate resources efficiently is paramount.”
The paper found that the high investment efficiency among the well compensated CIOs can be partly attributed to their portfolio allocation to real estate and private equity, which outperformed the public equity markets during the sample period. CIOs who are paid in the top quartile allocate 1.2 percent more of their portfolios to real estate and 2.1 percent more to private equity than those who are not paid in the top quartile, according to the paper. They also allocate 1.8 percent less to public equities.
In addition, the paper found that CIOs in financial centers, such as New York, Boston, and San Francisco, have higher investment efficiency than their peers who live elsewhere. On average, CIOs in financial centers generate 24 percent higher investment efficiency than their non-financial center counterparts.
“CIOs in financial centers may benefit from extensive and dense networks that foster collective behavior, enabling them to stay informed about market trends, emerging opportunities, and potential risks,” according to the paper. “These networks also facilitate learning, mentorship, and collaboration among CIOs, leading to improved investment efficiency.”
