Paying for Performance in Public Pension Plans

Forthcoming, Management Science

68 Pages Posted: 18 Feb 2021 Last revised: 18 Mar 2022

See all articles by Yan Lu

Yan Lu

University of Central Florida - College of Business Administration

Kevin Mullally

University of Central Florida

Sugata Ray

University of Alabama - Department of Economics, Finance and Legal Studies

Date Written: February 8, 2021

Abstract

We examine the relation between public pension plan Chief Investment Officer (CIO) compensation and plans’ investment performance. Higher paid CIOs outperform their counterparts by 47 – 60 bps per year, largely through increased and superior investment in private equity and real estate. This outperformance generates an additional $74.91 – $95.63 million in economic value. 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 directly affect performance. Demand- and supply-side frictions help explain the variation in CIO pay and the persistent low compensation paid by some plans despite the positive relation between compensation and performance.

Keywords: Public pension fund performance, compensation, incentives

Suggested Citation

Lu, Yan and Mullally, Kevin and Ray, Sugata, Paying for Performance in Public Pension Plans (February 8, 2021). Forthcoming, Management Science, Available at SSRN: https://ssrn.com/abstract=3781915 or http://dx.doi.org/10.2139/ssrn.3781915

Yan Lu

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

Kevin Mullally (Contact Author)

University of Central Florida ( email )

412 CBA
Orlando, FL 32827
United States
407-823-2360 (Phone)

Sugata Ray

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

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