Pension Funds and Incentive Compensation: A Story Based on the Ontario Teachers' Experience

Abstract

This article describes the evolution of the incentive compensation system for the investment division of Ontario Teachers' Pension Plan. Today, the system is based on carefully-designed interfaces between actual results, investment benchmarks, risk budgets, and compensation formulas. The authors note that the system is part of a broader compensation structure that rewards managers on the basis of overall absolute fund performance combined with benchmark-relative performance.

Keywords: Integrating Risk and Compensation, Investment Incentive, Pension Fund, Risk Budgeting, Rotman