Claude Lamoureux, the high-profile leader of the Ontario Teachers Pension Plan and a vocal critic of excessive pay for corporate leaders, found himself in the unusual position of explaining his own compensation yesterday.
Mr. Lamoureux saw his bonus jump more than 300 per cent last year to $3.4-million from $1-million in 2003, thanks to a revised long-term incentive scheme that more richly rewards executives for a string of above-average years at the giant pension fund. The total pay package for the Teachers president and chief executive officer more than doubled, to $4.5-million from $2.1-million in 2003.
The new incentive plan, approved by the board of directors in 2000, saw bonuses for all the pension fund's top five executives jump more than threefold, with some taking home six times more in bonus than in 2003. Bonuses for all the top five executives exceeded $1.5-million last year.
Yesterday, Mr. Lamoureux said the payouts under the new Teachers plan reflect the consistent ability of managers to beat industry benchmarks by a wide margin. Teachers, which has assets under management of $84.3-billion, posted a 14.7-per-cent return on investments last year, comfortably topping the fund's target of 10.6 per cent.
The return also outpaced peers such as the Caisse de dépôt et placement du Québec and the Ontario Municipal Employees Retirement Board, which had returns of 12.2 per cent and 12.1 per cent respectively.
Mr. Lamoureux said the heftier pay packages also reflect the financial rewards required to hold on to such high-performing staff.
"We want to make sure that our people have the ability, if we do well, to do very well and to stay here," he said. "The most expensive thing for us is to have turnover."
Ken Hugessen, head of the Canadian compensation practice at Mercer Human Resource Consulting, said all public pension funds face a similar struggle. Boards of directors at funds want to reward performance and remain competitive, he said, but they also must be mindful that they are overseeing the retirement savings of their members.
"This is a real challenge for the public pension funds. They are all going after a relatively small pool of investment managers," he said. "It is an industry where lots of money can be made."
Mr. Lamoureux acknowledged yesterday that this year's payouts were higher than the board anticipated when it approved the four-year incentive plan. It never expected managers to outperform their benchmarks by so much and for so many years, he said. "We did better than the board or anyone expected in our investment returns."
Under the terms of the bonus plan, investment managers have access to 2 per cent of the amount by which the fund exceeds its benchmarks over a four-year period. Between 2000 and 2004 that was $9.7-billion, or about $2.4-billion annually, Teachers spokeswoman Lee Fullerton said. This year's bonus pool is 2 per cent of that annual total, or about $49-million, she said.
Last year, the board made changes to the plan that will reduce the maximum amount available under the bonus plan for the next four-year term, she said.
Mr. Lamoureux said the disparities in personal compensation between the pension fund and the Street can be seen in private equity deals such as Teachers' investment in Yellow Pages Group. Co-investor Kohlberg Kravis Roberts & Co., the New York buyout firm, took more from that deal, he said, than his entire management team made in a year and KKR staff had the chance to put their own money in the deal and make huge personal gains, as well. "We cannot offer that," he said.
In all, investment income at the pension fund was $10.8-billion last year, down slightly from $11.4-billion in 2003. The returns were led by a $1-billion gain on the value of its real estate holdings and strong results in private equity investments.
Despite the strong returns, the gap between assets and the funds needed to pay future pensions continued to widen in 2004. Low interest rates, which push up liabilities, resulted in a drop in the funded status of the pension fund to 84 per cent at the end of 2004 from 94 per cent in 2003.
In response to the changing financial state of the plan, the pension fund said it has lowered its target exposure to public equity markets to 45 per cent of its portfolio from 50 per cent. That move "reflects the plan's reduced ability to take on risk due to the growing funding shortfall and our view of the outlook for capital markets," the fund said in its annual report released yesterday. Mr. Lamoureux said Teachers is looking to increase the portion of its portfolio devoted to infrastructure and private equity investments.