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Michael Williamson, SWIB Executive Director
Michael Williamson

SWIB: Paying for Performance Works
by Michael Williamson, SWIB Executive Director

This is the time of year when I get questions about incentive compensation payments. SWIB's Board of Trustees recently approved staff incentive compensation awards in recognition of investment performance that added $42 billion to the WRS Trust Funds over the past 10 years. I want to take this opportunity to talk with you about those payments and why they are important.

When we at SWIB determine how to invest the $100 billion in WRS assets, we analyze whether it makes more sense to use external managers to invest the assets or whether we can manage them with our internal staff. We have steadily moved in the direction of increasing the assets we manage internally, and are currently managing $65 billion with our SWIB staff. The reason for this shift is that external investment managers cost the WRS multiples more than what it costs for SWIB's own staff to manage those assets. In addition, using internal staff gives us more control over the investments. To make our strategy successful, SWIB needs to hire talented and skilled staff who could otherwise work for an asset management firm that is willing to pay high salaries and performance-based incentives. Luckily, this is Wisconsin, which means we do not have to pay the same level of salaries as money managers on the East and West coasts. Our Board understands this and has targeted compensation payments to align with the median of a conservative peer group that includes banks and insurance companies in the Midwest. These are the organizations that we compete with for talent; they know how difficult it is to find and keep good staff and use competitive compensation levels to help them do so. Our compensation plans exist to allow us to hire and keep the highly skilled staff we need to prudently and effectively manage our investment strategy.

So, while we do not have to pay Wall Street salaries, there is an area where we are similar. Both of our compensation plans are based on performance. When performance is good, incentive compensation payments increase and conversely, when performance targets are not hit, compensation payments decline. We have found that paying for performance works. We compensate employees based on contributions to organizational performance and risk adjusted investment returns above market returns over the same five-year period that is used for determining retiree dividends. And that five-year performance above our benchmarks has been good.

As of the end of 2016, the five-year return for the Core Trust Fund was 8.6%, which was ahead of its benchmark of 7.7%. The return for the Variable Trust Fund was 10.6%, also ahead of its benchmark. That translates into $1.2 billion more than the market generated during the same period. And that is what we are paid to do — generate better returns for the WRS and our members than the market provides to most investors.

While SWIB's incentive compensation payments may seem high, even unnecessary to some, hiring skilled investment professionals saves money and generates better returns for the WRS and for you, our members. Our focus is not just cost. We are focused on value, and this system is generating value. Our incentive compensation plan is designed to attract and retain highly qualified professionals to manage the WRS trust funds. By almost any measure, the plan is achieving its desired results. Our performance in 2016 ranked in the top 25% of pension plans with more than $1 billion in assets. We have been able to attract and retain skilled professionals, which was not possible prior to the implementation of the plan. Even accounting for our incentive compensation payments, we have lower costs relative to those of our peers. In just 2015 alone, we cut almost $75 million off what it cost our peer pension systems to manage similar investments. And here is the kicker: Our entire internal budget in 2015 was just $53.5 million. Using our talented internal staff has helped us lower costs and generate strong returns.

I hope that you will think of our incentive compensation as an investment in value that pays off for the WRS now, and in the future.