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CLEMENT ALLARD

The heads of most of Canada's largest public sector pension plans were paid large bonuses in 2008 despite devastating returns from the market meltdown, raising calls for changes to the incentive pay structure used by the investment firms.

Chief executive officers of the Canada Pension Plan Investment Board, the Ontario Teachers' Pension Plan, the Ontario Municipal Employees Retirement System and others all received incentive payments for 2008 (or fiscal 2009 for funds with March 31 year-ends) - although many did see their total compensation decline.

The head of the Public Sector Pension Investment Board, which manages pension funds of federal government workers, actually got more pay in fiscal 2009, ended March 31, even though the PSPIB posted a loss of 22.7 per cent.

Gordon Fyfe earned $1.42-million, up 11 per cent from $1.28-million a year earlier, including an annual bonus of $189,122 and deferred incentive pay of $611,100.

Liberal Member of Parliament John McKay, who has been a vocal critic of oversized bonus payments in the sector, said he has no problem with paying high base salaries to top pension managers, but draws the line at large annual bonuses when pension funds lose big sums.

"If you're going to tie performance to compensation and compensation to performance, then it should truly be tied," Mr. McKay says. "It seems to me that the way this whole thing was structured, there was an up escalator and no down escalator."

One notable Canadian exception was Henri-Paul Rousseau, who received no bonus for 2008 as the head of the Caisse de dépôt et placement du Québec. The Caisse posted a 25-per-cent loss in 2008 and Mr. Rousseau was replaced as CEO amid a public furor about bad investment decisions.

Many of Canada's pension funds pay bonuses based on rolling average returns over the prior four-year period. That means each year, the fund calculates its current four-year return and uses that figure when setting bonuses. The bonuses are also typically set by comparing returns to standard benchmarks based on overall market performance.

This structure means even in a bad year like 2008, bonuses were still paid because many funds used a four-year average and weighed the 2008 performance against benchmarks.

Meanwhile, pension plan members simply saw bottom-line losses.

"At the end of the day, the pensioners don't want you to be the best of a worst bunch," argues compensation consultant Luis Navas, who specializes in pension plan pay. "They want to be sure their pension cost doesn't go up."

Mr. Navas advocates a different pay model that includes bottom-line absolute returns as a measurement factor, blending it with other performance features.

Such an approach has been adopted at OMERS, where absolute losses are a factor in bonus calculations, although CEO Michael Nobrega was still paid an annual bonus of $442,863 in 2008, down 50 per cent from $885,425 in 2007.

But basing bonuses on earning positive returns is not embraced by others, who say managers cannot be expected to earn large profits when markets crater.

David Denison, CEO of the CPPIB, says using returns compared to a benchmark also means it's possible to receive no bonuses in hot markets if fund managers don't beat their targets.

"We don't expect to have compensation directly proportional to the fact that markets have gone up," he says. "That's not in our control. … We say we should be measured on our value."

The argument does not convince New Democrat Deputy Leader Thomas Mulcair, who led a charge last year against pay at public sector pension plans. He argues most people see bonuses cut in bad years, even if poor corporate performance was caused by outside factors.

"It's because its become commonplace for them to pay themselves such large bonuses that it's become normal," Mr. Mulcair says. "But it's not normal in any correct sense of the word."

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