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Pension board to give big bonuses

Rewards provided despite fund losses

By Frank Phillips
Globe Staff / August 10, 2012
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The Massachusetts state pension agency is set to give a huge $815,000 performance bonus package to most of its 25-member staff, including a nearly $100,000 payout to its executive director, despite the fact that the fund sputtered through a fiscal year that ended with a slight loss in value.

The bonuses, which amount to nearly 20 percent of the entire 2012 staff payroll, will come on top of payouts last fall when the Pension Reserves Investment Management board awarded $267,328 in extra pay during a year when the fund also experienced a small loss.

Executive director Michael G. Trotsky’s $98,000 performance bonus this year is the agency’s largest, boosting his annual salary to $343,000. Trotsky’s secretary, who makes $60,000 a year, will receive an additional $18,000.

The bonuses will kick in automatically, according to a 2007 plan that set annual benchmarks for the fund’s growth.

Under that system, pension fund employees can collect bonuses amounting to 30 to 40 percent of their salaries if they meet or exceed the benchmarks that are based on a rolling three-year period. ­Because the fund’s investments, particularly its stock assets, have strongly rebounded since the market crash in 2009, the bonuses continue to kick in this year, despite a small loss. In only one year since 2010, when the benchmarks were established, were the losses so large that no bonuses were distributed.

The pension board is believed to be the only Massachusetts agency to give large performance ­rewards. Its payouts have been particularly controversial in recent years, as public employees across the country face layoffs and see their salaries and benefits slashed.

Friday morning, the agency board, which oversees a $48.8 billion fund, is scheduled to receive a briefing from Trotsky about the fund’s performance in the fiscal year that ended June 30. According to a copy of the report obtained by the Globe, Trotsky touts the fact that he and the staff weathered volatile markets and were able to exceed their established performance benchmark for this year, although by only a fraction of a percentage point.

In an interview Thursday, Trotsky strongly defended the bonus system and his pay hike, saying it is vital for the agency to retain experienced and competent staff. Those employees, he said, have helped increase the value of the fund over the last three years by $2.6 billion above the benchmarks set in 2007.

“We are paid on a three-year-basis, and our three years are strong,’’ Trotsky said. “It shows we generated $2.6 billion in excess returns.’’

The executive director, in his report to the board, will argue that the flat performance for the past year is “remarkable when put into perspective.’’ He cites the fact that the fund’s invest­ments in emerging equity and international markets took a beating. But he said a decision a year ago to reduce equity invest­ments and shift money into other areas protected the fund’s value from turbulent markets and allowed it to end the year without a more serious loss.

The pension board’s chairman, Steve Grossman, said he strongly opposes the current bonus system and will push to overhaul the compensation system, including a provision that would prohibit bonuses in a year when the fund loses money. The fund lost about $300 million in the last fiscal year.

“I think the citizens of Massa­chusetts would think it inappropriate, and it lacks common sense for any company or public organization to pay ­bonuses when it lost money,’’ Grossman said. He sits on the compensation committee that is reviewing the pay system and the performance rewards. It is expected to make recommendations later this year.

Performance bonuses at the nation’s other state pension agencies are not uncommon, said Keith Brainard, research director for the National Association of State Retirement Administrators. What is less common is that the extra pay is ­extended to staff members who are not directly involved in investment decisions. For example, the Massachusetts agency’s general counsel, Christopher J. Supple, will get a $66,000 boost to his $165,000 pay check.

Some states — such as New York, which has a $150 billion pension fund — have no bonus system. That state pays the head of its fund a flat $300,000. In Maryland, the executive ­director makes $143,271 a year to oversee a fund of approximately $37 billion. The only person at that agency eligible for a bonus, however, is the chief investment officer.

“It’s a mixed bag,’’ Brainard said. The Massachusetts system, he said, is a reasonable way to help ­retain a staff who might otherwise be lured to higher-paying jobs in the private sector.

“Clearly, if you can get public employees to add millions of dollars to a portfolio, it is a very valuable tool,’’ he said.

But Brainard said he was not aware of other instances in which pension fund performance bonuses are extended to the entire support staff, as they are in Massachusetts.

Trotsky countered that there are some public pension funds nationally that include support and admin­istrative staff in the payouts. He was unable to imme­diately supply examples, but said he feels strongly that the bonus money should be spread through the ranks.

“We are all on the same team, and we all have the same goal, that is. to maximize fund performance for beneficiaries,’’ he said. “To separate the team into two different pay structures would be a cancer to morale and would divide a team that instead should be unified in pursuing the same goal.’’

Frank Phillips can be reached at

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