GGA advises CalPERS to tweak incentive hurdles after 10‑year lookback

Global Governance Advisors presented an initial review of CalPERS incentive metrics to the Performance, Compensation and Talent Management Committee on April 8, saying modest adjustments are warranted based on recent performance history.

GGA examined a 10‑year lookback for total fund value‑add results and an eight‑year lookback for enterprise operational effectiveness. The firm noted the board’s current “0/5/10” structure (threshold at 0 basis points, target at 5 bps and maximum at 10 bps of total‑fund outperformance) has been met or exceeded more often than expected at the top end. “Over the last 10 years the maximum level has been hit roughly half the time, which suggests the 10‑basis‑point hurdle for the top payout could be set a bit low,” GGA said.

On operational effectiveness, GGA found the threshold level has been achieved slightly more often than their 80% design target while the maximum has been achieved less often than the 20% expectation, and suggested recalibrating the lower and upper bounds to better match historical probabilities of attainment.

GGA also addressed how to treat employees who become incentive‑eligible mid‑career. The firm reviewed three alternatives — phased‑in measurement (count actual performance for years served), immediate adoption of the five‑year performance window for all incumbents, and a hybrid that assumes target performance for pre‑hire years — and recommended the second approach (immediate adoption) as the simplest and most consistent with market practice. GGA noted CalPERS historically used the phased approach but said immediate adoption is commonly used by large public funds.

GGA described the current review as a “tweak” year and said larger changes are likely if the board adopts a TPA; it will return in June 2025 with final recommendations for fiscal‑year 2026–27 implementation. The committee took no vote on metrics at the meeting.