CalPERS begins incentive redesign as board shifts to a total‑portfolio investment approach

The CalPERS Performance, Compensation & Talent Management Committee held an educational session on aligning incentive metrics to a total‑portfolio approach (TPA) and directed staff and consultants to return in June with formal recommendations.

Brad Kelly and Peter Landers of Global Governance Advisers briefed the committee on international and peer practices for TPA‑aligned incentives. They summarized three models — the Australian Future Fund, New Zealand Superannuation Fund and CPP Investments — and identified common elements: a total‑fund performance focus, a reference portfolio for measuring value added, a blend of absolute and relative performance measures and an individual qualitative component that includes collaboration and values.

"Having a sizable portion at risk is important — not just paying people to show up, but paying for the performance and achievements they deliver," Kelly said, explaining the rationale for multi‑year measures and long‑term incentives. Peter Landers said the long‑term incentive is typically five years and serves a strong retention purpose because participants must remain through the vesting period to realize the award.

Consultants recommended a phased, cautious approach to adopting TPA metrics in incentive calculations. Because CalPERS measures incentives on multi‑year trailing periods, consultants and staff advised that the committee phase in TPA measurement: early years should reflect a blend of prior strategic asset allocation (SAA) performance and increasing weight on TPA results until rolling five‑year TPA measurement is fully established.

Committee members raised practical concerns about fairness and public optics, including whether to allow limited underperformance ranges during the transition. Speakers from Wilshire Advisors and GGA cautioned against designs that would effectively reward clear underperformance and urged tying payouts to demonstrable value added and robust qualitative assessments. Committee members also requested a legal memorandum on constraints that limit certain exchanges between senior staff and trustees; CalPERS legal staff agreed to prepare the memo and meet with committee members.

Public comment urged the board to tie incentives to measurable matters within staff control and to avoid rewarding failure. Consultants and staff said they will return to the committee in June with finalized proposed incentive metrics and with stress‑testing of candidate hurdle levels.

What’s next: GGA will produce a recommendation for incentive metrics, including reference‑portfolio hurdle rates and a proposed phasing plan for TPA measurement; CalPERS legal staff will issue a memo on statutory constraints affecting board‑staff interaction and compensation design.