CalPERS Latest Activism Target: Asset Mgr. Comp.

April 7, 2004 ( - The California Public Employees' Retirement System (CalPERS) is forcing asset managers to rethink how they pay their employees with its recent requirement that compensation be linked to performance.

CalPERS adopted the requirement earlier this year as part of a broader code of ethics that outside money managers and consultants have to abide by to keep doing CalPERS’ business, Dow Jones reported (See  CalPERS Ponders Fund Investor Principles ). Although the giant pension fund has refrained from setting up specific rules, the decision to stick its organizational nose in the compensation of outside money managers could leave some of those managers unhappy.

Some managers told Dow Jones privately that they consider it undue micromanagement. One of CalPERS’s fixed-income managers, for example, said that while he hasn’t received notice of the change, he wasn’t surprised, because the pension plan had recently surveyed him about his hiring and compensation practices and policies.

Because of the vagueness of the CalPERS requirements, though, several funds already may be in compliance. Franklin Resources, for instance, said it already links pay to its performance. Other firms had been moving toward clearer compensation policies. The chief executive of Alliance Capital Management Holding, Lewis Sanders, recently told a group of pension funds that he is moving to improve governance in the wake of the mutual-fund scandal. He said the moves include an effort to better align compensation with performance at the firm.

Pressure to change compensation practices isn’t just idle chest beating either. CalPERS has the size to force through changes in how asset-management companies conduct their business. With $164.1 billion in assets under management, CalPERS is a coveted client for investment managers and frequently drives changes to industry practices nationally.

But it also has a history of activism, which has prompted some companies to avoid it. For instance, when CalPERS decided to publish performance data about its private-equity and venture-capital investments, several venture-capital firms said they would think twice before taking CalPERS money.

The CalPERS ethics code is designed to address short-term trading by portfolio managers and other improper activities that could threaten the security of CalPERS members’ assets. It includes disclosure of the use and cost of soft dollar arrangements and implementation of policies designed to promote the alignment of interests of investment professionals with clients.

Beginning in December, money managers will be required to report to CalPERS twice yearly about their adherence to the code.