TEACHERS RETIREMENT BOARD. COMPENSATION COMMITTEE Item Number: 3

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1 TEACHERS RETIREMENT BOARD COMPENSATION COMMITTEE Item Number: 3 SUBJECT: Report and Recommendations from Labor Market Compensation Analysis for Statutory Positions CONSENT: ATTACHMENT(S): 2 ACTION: X DATE OF MEETING: / 90 mins INFORMATION: PRESENTER(S): Melissa Norcia/ Michael Oak, McLagan Partners/Axay Patel, Aon Hewitt PURPOSE The purpose of this item is to provide the committee with a report and recommendations on a labor market compensation analysis for positions under the board s compensation setting authority and to assist the committee in its assessment of whether changes to salary ranges or incentive plan components are warranted. BACKGROUND Education Code Section gives the board authorization to determine compensation of specific CalSTRS Executive management and Investment staff. The board has compensation setting authority for the following positions: Chief Executive Officer (CEO), Chief Investment Officer (CIO), Deputy Chief Investment Officer, Investment Directors, Portfolio Managers, Associate Portfolio Managers, Investment Operations Director, System Actuary and General Counsel. Effective January 1, 2017, the Section was amended (AB 736) to include the positions of Chief Operating Officer and Chief Financial Officer. As delineated in the Board Policy Manual Section 700 Compensation Policy for Designated Executive Management and Investment Staff, relevant market compensation data will be secured from reputable, third party sources, every two years or as otherwise determined by the TRB s Compensation Committee. Per the committee s direction, a report on a labor market compensation analysis for statutory positions was placed on the committee s work plan. The last time the committee evaluated labor market data for investment positions under the board s salary setting authority was during the 2012/2013 plan year. At its September 2016 meeting, the committee directed Michael Oak, Director at McLagan Partners, to provide a labor market analysis that included the value of benefits in the compensation package in addition to the total cash compensation (base salary + annual incentive) provided in previous studies. At its November 2016 meeting, the committee reviewed three proposed alternatives with varying levels of compensation detail and associated costs. The committee selected the alternative that would present, in detail, components of total rewards (base salary + annual incentive +long-term incentives, + retirement and health benefits) for each classification at various service scenarios (e.g., <5, 5, 10, 20 years of service). The committee COMP 6

2 Compensation Committee Meeting Item 3 Page 2 discussed that although this level of detail may not be required for future compensation studies, it would be beneficial to receive a complete picture of total reward compensation at this time. DISCUSSION For this discussion Michael Oak, Director at McLagan Partners and Axay Patel, Actuarial Consultant Retirement and Investment at Aon Hewitt will present to the committee a Labor Market Compensation Analysis/Total Rewards Review that will inform on five key items. Bradford Klinck, Partner Retirement and Investment and Paul Harris, Senior Vice President Health and Benefits from Aon Hewitt will participate via teleconference. Their presentation is included in. 1. Total Rewards Findings. McLagan and Aon Hewitt compared CalSTRS total rewards (base salary + annual incentive + retirement and health benefits) to the competitive market (pay + annual incentive + long-term incentives + retirement and health benefits). McLagan and Aon Hewitt will walk the committee through the findings. In summary, the review revealed the following: CalSTRS benefit value represents a small portion of its total rewards (base salary + annual incentive + retirement and health benefits). The CalSTRS benefit value doesn t influence its positioning in the competitive market in a meaningful way. Long-term incentives within the peer group are a key driver for CalSTRS positioning below market (median). The findings support the discussion involving a comprehensive review of CalSTRS incentive plan structure for the FY work plan, proposed in today s agenda Item # Chief Operating Officer (COO) and Chief Financial Officer (CFO) - Setting base salary and incentive opportunity. Education Code was recently amended to include the positions of Chief Operating Officer and Chief Financial Officer. McLagan is recommending the following base salary and incentive opportunity for the COO and CFO positions: Salary + 40% Incentive Min: $204,000 Min: $285,000 Mid: $250,000 Mid: $350,000 Max: $296,000 Max: $415,000 The amended Education Code includes a provision that limits annual salary increase amounts for current incumbents in these positions. The statute states, in part: The annual percentage increase in salary that may be paid pursuant to this section to a person who served as chief financial officer or as chief operating officer on January 1, 2016, and who does not separate from service in that position prior to the date on which the increase is applied, shall not exceed either of the following: COMP 7

3 Compensation Committee Meeting Item 3 Page 3 (1) Ten percent for the fiscal year. (2) Five percent for any fiscal year subsequent to If the committee moves to adopt McLagan s recommendations as presented, an interim minimum will need to be established in order to facilitate the salary transition parameters within the amended code. McLagan recommends the incentive opportunity be weighted 50 percent to CalSTRS strategic plan and 50 percent to personal performance linked to the executive competencies outlined in the executive performance evaluation tool. Committee Action: Staff recommends the committee approve the compensation structure recommendations provided by McLagan with an alternative minimum salary range for the CFO and COO effective July 1, 2017 as follows: Base Salary Range Min: $199,703 (10% above current salaries) Mid: $250,000 Max: $296,000 Maximum Incentive Opportunity of 40% weighted as follows: Criteria Weight Performance Measures Long-Range Strategic Planning 50% Chief Executive Officer Evaluation Personal Performance 50% Chief Executive Officer Evaluation 3. General Counsel - Setting base salary and incentive opportunity. The General Counsel s salary was reviewed in September At that time, McLagan s recommendation included two alternatives: Alternative 1: Salary Only Min: $306,000 Mid: $375,000 Max: $444,000 Alternative 2: Salary + 20% Incentive Min: $281,000 Min: $337,000 Mid: $345,000 Mid: $414,000 Max: $409,000 Max: $491,000 McLagan also recommended the incentive opportunity, if any, be weighted 100% to qualitative factors, linked to CalSTRS strategic plan, leadership, and individual goals. COMP 8

4 Compensation Committee Meeting Item 3 Page 4 During the September 2016 meeting, the committee expressed its desire to exclude the General Counsel position from incentive compensation eligibility. The committee also conveyed its apprehension to adopt the salary only total compensation value recommended by McLagan without better understanding the value of benefits in the compensation makeup. In light of the information requested from McLagan, the committee concluded that a decision on the base salary should be moved to the April meeting for inclusion with the total rewards/labor market compensation analysis involving the other statutory positions. There has been no change to competitive market pay for the General Counsel position since the September evaluation. Given that the committee has expressed its desire to exclude the General Counsel from incentive eligibility, but also their concern about the gap from current salary to the salary only option, the Committee may want to consider a blended alternative between the two salary range recommendations as follows: Base Salary Range Min: $281,000 (11% salary transition for the incumbent) Mid: $363,000 Max: $444,000 The General Counsel would be excluded from incentive eligibility under this blended alternative. Committee Action: Staff recommends that the committee approve one of the McLagan compensation recommendations or the above noted blended alternative for the General Counsel position effective July 1, Portfolio Manager Setting Base Salary. To align the Portfolio Manager s compensation with the market median, McLagan recommends a modest increase to the base salary range: Base Salary Range Min: $172,000 Mid: $215,000 (5 % increase to current range) Max: $258,000 Committee Action: Staff recommends that the committee approve McLagan s recommendation for the Portfolio Manager position effective July 1, COMP 9 5. CEO and Investment Management Competitive Market Positioning. McLagan s analysis revealed the following: CalSTRS base salaries are competitive, generally positioned at or above the competitive median. Except for the Portfolio Manager, McLagan is recommending no changes to base salaries.

5 Compensation Committee Meeting Item 3 Page 5 CalSTRS total cash (base salary + annual incentive) is below the competitive median for all positions. In particular, the CEO, CIO, and DCIO. McLagan is recommending for positions that are 10% or more below the market (CEO, CIO, and DCIO) the Committee review incentive opportunities as part of the comprehensive incentive framework review in FY as proposed in today s agenda Item # 5. This labor market study was meant to test the salary ranges for these positions. The findings provide a good roadmap to tackle the long-term incentive discussion which will need considerable board input. Committee Decision Points: - There are no decision points at this time; however incentive opportunities should be included in the comprehensive compensation analysis on the work plan as proposed in today s agenda Item # 5. To further assist the committee in its decisions is a Total Cash Opportunity/Internal Equity Comparison chart (Attachment 2) which shows executive and investment management positions and their respective (and proposed) salary ranges and incentive opportunity. NEXT STEPS Staff will incorporate approved changes into the Administrative Procedures for the Teachers Retirement Board s Compensation Policy Section 700. Adjustments to base salary ranges will result in a change of actual pay for individuals in impacted positions. COMP 10

6 Total Rewards Review Executive and Investment Positions COMP 11

7 Introduction 2 California State Teachers Retirement System (CalSTRS) asked McLagan to assess the salary and total cash compensation for nine executive and investment management positions: Investment Positions Executive Positions* Chief Investment Officer Deputy Chief Investment Officer Investment Director Portfolio Manager Director of Inv. Operations Associate Portfolio Manager Chief Executive Officer Chief Operating Officer Chief Financial Officer General Counsel In addition, CalSTRS asked McLagan and Aon Hewitt to provide data on total direct compensation and total reward values including long-term incentives, retirement, and health benefits. This report contains our findings as well as proposed alternative salary and incentive structures for certain positions designed to better align CalSTRS pay positioning with its compensation philosophy. Importantly, CalSTRS pay philosophy is to be aligned with market median total cash compensation (i.e., base salary + annual incentive). While values for long-term incentives and benefits are included in this report, these values were not taken into consideration when preparing the alternatives. * Note the the System Actuary position is excluded from this report as it was reviewed at the June 2016 Board meeting. COMP 12

8 Methodology 3 Data was assembled from CalSTRS board-approved policy comparator groups for investment and executive positions: Investment Positions: leading institutional investors and mid-sized asset managers (e.g., AUM $150B to 350B). Executive positions: a weighted average made up of 67% leading public funds and 33% broad private-sector investment management organizations. The following compensation and benefit components are included: Base salary. Total cash (base salary + annual incentives). Total direct compensation (total cash + long-term incentives such as restricted stock, stock options, mutual fund deferrals, etc.). Total rewards (total direct comp + retirement and health benefits). COMP 13

9 Executive Summary 4 Executive Positions For the reviewed executive positions, CalSTRS pay positioning is as follows: CalSTRS base salaries fall below the competitive 25 th percentile for all executive positions except the CEO, which is positioned near the median. Factoring in maximum incentive, CalSTRS remains positioned below the 25 th percentile, except for the CEO position, which falls between the 25 th percentile and median. Recognizing CalSTRS intends to complete a broader compensation review as part of the work plan, we recommend reviewing the CEO s incentive opportunity at that time. From a total rewards perspective (e.g., factoring in long-term incentives and benefits) CalSTRS is positioned even further behind market. Recommendations are provided further in this report for establishing salary ranges and incentive opportunities for the COO and CFO positions. In addition, recommended adjustments to the General Counsel salary range are also presented. COMP 14

10 Executive Summary 5 Investment Positions As shown on the following pages, CalSTRS Investment Management pay positioning suggests: CalSTRS base salaries are competitive, generally positioned at or above the competitive median. However, we do recommend a modest change to the Portfolio Manager salary range further in this report. CalSTRS maximum cash compensation (base salary + maximum incentive), at midpoint, is below the competitive median for all positions. In particular, the Deputy CIO and CIO are furthest from market. As with the CEO position, we recommend reviewing these incentive ranges as part of the broader compensation review in the work plan. Factoring in long-term incentives and benefits, CalSTRS is positioned well below the competitive median (in many cases, approximating or below the competitive 25 th percentile). This is driven primarily by long-term incentive compensation within the competitive market. A modest change to the Portfolio Manager salary range is presented later in this report. COMP 15

11 Executive Positions COMP 16

12 Executive Management Findings 7 For all positions, CalSTRS base salary + maximum incentive lags the market. To align CalSTRS pay positioning to its compensation philosophy, we recommend CalSTRS take the following steps: Establish a salary range and incentive opportunity for the COO and CFO. Consider whether or not the General Counsel position should be incentive eligible. Increase the base salary range for the General Counsel position using one of the alternatives provided further in this report. Evaluate the incentive opportunity of the CEO position as part of the broader compensation review in the work plan. Market positioning and recommendations are detailed on the following pages. COMP 17

13 Executive Management Base Salary vs. Market 8 $500 Base salary $450 $400 $350 $300 $250 $200 $150 $100 COO CFO General Counsel CEO CalSTRS Market CalSTRS Market CalSTRS Market CalSTRS Market Max / 75th $182 $267 $182 $269 $252 $281 $475 $479 Mid / Median Min / 25th CalPERS Mid na *CalPERS shown for reference only. COMP 18

14 Executive Management Maximum Cash vs. Market Total Cash 9 $2,000 Base salary + maximum annual incentive $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 COO CFO General Counsel CEO CalSTRS Market CalSTRS Market CalSTRS Market CalSTRS Market Max / 75th $209 $440 $209 $677 $252 $626 $855 $1,872 Mid / Median ,064 Min / 25th CalPERS Mid na *CalPERS shown for reference only. COMP 19

15 Executive Management Total Rewards (including long-term, retirement, and health) 10 The following pages show how CalSTRS total rewards (base salary + annual incentive + retirement and health benefits) compares to the competitive market (e.g., salary + annual incentive + long-term incentives + retirement and health benefits). Retirement values were calculated for each position over a range of years-of-service scenarios. While CalSTRS benefit value (retirement + health) is significant, it represents a relatively small portion of total rewards. CalSTRS positioning below market is largely driven by long-term incentives within the peer group. This analysis does not include any consideration of non-tangible benefits (e.g., public service, etc.). Note that total rewards was not considered in the proposed alternatives contained within this report. Please see appendix for detailed benefits assumptions and methodology. COMP 20

16 Executive Management Total Rewards (detailed example for CEO position) 11 3,250 3,000 CalSTRS compensation philosophy is to be competitive with the median total cash Health Retirement CalSTRS Market 2,750 2,500 2,250 Long-Term Incentives na 2,000 1,750 1,680 1,684 1,692 1,702 1,716 1,500 1,250 1, Cash Bonus Base Salary 0 MinMidMax MinMidMax MinMidMax MinMidMax MinMidMax MinMidMax MinMidMax MinMidMax MinMidMax MinMidMax CalSTRS Market CalSTRS Market CalSTRS Market CalSTRS Market CalSTRS Market 1-Year 5-Year 10-year 15-year 20-year COMP 21

17 Executive Management Total Rewards (assumes 20 years of service for highest retirement value) 12 $3,500 Base salary + annual incentive + long-term incentives + retirement + health $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 COO CFO General Counsel CEO CalSTRS Market CalSTRS Market CalSTRS Market CalSTRS Market Max / 75th $290 $588 $290 $880 $361 $792 $969 $3,145 Mid / Median ,716 Min / 25th COMP 22

18 Executive Management Recommendations 13 COO & CFO To align the COO s and CFO s compensation with the market median, CalSTRS should establish base salaries and incentive opportunities as follows: Base salary ranges: Current Base Salary Max: 182K Mid: 148K Min: 123K Maximum incentive opportunity of 40% such that base salary + maximum incentive would be positioned near the competitive median: Current Base Salary + Max Incentive Max: 209K Mid: 170K Min: 141K Recommended Range Max: 296K Mid: 250K Min: 204K Recommended Salary + Max Incentive Max: 415K Mid: 350K Min: 285K * The incentive for the COO and CFO positions would be weighted 100% to qualitative factors linked to CalSTRS strategic plan, leadership and individual goals - TBD. COMP 23

19 Executive Management Recommendations 14 General Counsel As presented at the September 2016 meeting, two proposed alternatives would align CalSTRS General Counsel compensation with the competitive median. I. Base Salary Only Approach: increase base salary to be better aligned with the competitive base salary + annual incentive: Current Base Salary Max: 252K Mid: 205K Min: 170K Proposed Alternative Salary Max: 444K Mid: 375K Min: 306K II. Base Salary + Incentive: increase base salary and include a 20% incentive opportunity to be aligned with the competitive base salary + annual incentive: Current Salary Max: 252K Mid: 205K Min: 170K Proposed Alternative Salary Max: 409K Mid: 345K Min: 281K Proposed Salary + 20% Max Incentive Max: 491K Mid: 414K Min: 337K * The incentive for the General Counsel position would be weighted 100% to qualitative factors linked to CalSTRS strategic plan, leadership and individual goals - TBD. COMP 24

20 Executive Management Recommendations 15 General Counsel (continued) III. Blended Base Salary: to transition the current base salary to a salary-only approach aligned with competitive pay levels, a third alternative is to adopt the lower salary minimum and the higher salary maximum to create a new range: Current Base Salary Max: 252K Mid: 205K Min: 170K Proposed Alternative Salary Max: 444K Mid: 363K Min: 281K CEO While the base salary for the CEO is market competitive, CalSTRS base salary + maximum incentive falls between the 25 th percentile and median. For this reason, we recommend that CalSTRS review the CEO s incentive opportunity during the broader compensation review part of the work plan. COMP 25

21 Investment Management Positions COMP 26

22 Investment Management Findings 17 CalSTRS base salaries for investment management positions are generally competitive. As indicated earlier, the only recommended change to base salaries is for the Portfolio Manager position. CalSTRS maximum cash compensation (base salary + maximum incentive), at midpoint, is below the competitive median for all positions. In particular, the Deputy CIO, and CIO are furthest from market. We recommend reviewing incentive opportunities for these positions as part of the broader compensation review in the work plan. Factoring in long-term incentives and benefits, CalSTRS is positioned well below the competitive median (in many cases, approximating or below the competitive 25 th percentile). This is driven primarily by long-term incentive compensation within the competitive market. Market positioning and recommendations are detailed on the following pages. COMP 27

23 Investment Management Base Salary vs. Market 18 $600 Base salary $500 $400 $300 $200 $100 Assoc PM Dir of Inv Ops PM Inv Dir Deputy CIO CIO CalSTRS Market CalSTRS Market CalSTRS Market CalSTRS Market CalSTRS Market CalSTRS Market Max / 75th $162 $175 $246 $250 $246 $259 $392 $310 $408 $395 $612 $565 Mid / Median Min / 25th CalPERS Mid 135 na na 510 *CalPERS shown for reference only. COMP 28

24 Investment Management Maximum Cash vs. Market 19 $2,500 Base salary + maximum annual incentive $2,000 $1,500 $1,000 $500 $0 Assoc PM Dir of Inv Ops PM Inv Dir Deputy CIO CIO CalSTRS Market CalSTRS Market CalSTRS Market CalSTRS Market CalSTRS Market CalSTRS Market Max / 75th $227 $260 $369 $405 $431 $510 $686 $825 $734 $1,300 $1,224 $2,250 Mid / Median ,020 1,257 Min / 25th CalPERS Mid 189 na na 893 *CalPERS shown for reference only. COMP 29

25 Investment Management Total Rewards (including long-term, retirement, and health) 20 The following pages show how CalSTRS total rewards (salary + incentive + retirement and health benefits) compares to the competitive market (e.g., salary + annual incentive + long-term incentives + retirement and health benefits). Retirement values were calculated for each position over a range of years-of-service scenarios. While CalSTRS benefit value (retirement + health) is significant, it represents a relatively small portion of total rewards. CalSTRS positioning below market is largely driven by long-term incentives within the peer group. This analysis does not include any consideration of non-tangible benefits (e.g., public service, etc.). Please see appendix for detailed benefits assumptions and methodology. COMP 30

26 Investment Management Total Rewards (detailed example for CIO position) 21 3,250 3,000 CalSTRS compensation philosophy is to be competitive with the median total cash CalSTRS Market Health Retirement 2,750 2,500 2,250 2,263 2,268 2,276 2,287 2,302 Long-Term Incentives na 2,000 1,750 1,500 Cash Bonus 1,250 1,000 1,046 1,068 1,084 1,105 1, Base Salary 0 MinMidMax MinMidMax MinMidMax MinMidMax MinMidMax MinMidMax MinMidMax MinMidMax MinMidMax MinMidMax CalSTRS Market CalSTRS Market CalSTRS Market CalSTRS Market CalSTRS Market 1-Year 5-Year 10-year 15-year 20-year COMP 31

27 Investment Management Total Rewards (assumes 20 years of service for highest retirement value) 22 $3,500 Base salary + annual incentive + long-term incentives + retirement + health $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 Assoc PM Dir of Inv Ops PM Inv Dir Deputy CIO CIO CalSTRS Market CalSTRS Market CalSTRS Market CalSTRS Market CalSTRS Market CalSTRS Market Max / 75th $304 $405 $476 $556 $476 $705 $800 $1,332 $848 $1,900 $1,338 $3,035 Mid / Median ,394 1,134 2,302 Min / 25th ,049 COMP 32

28 Investment Management Recommendations 23 Portfolio Manager To align the Portfolio Managers compensation with the market median, CalSTRS could modestly increase base salary as follows: Current Base Salary Max: 246K Mid: 205K Min: 164K Proposed Alternative Max: 258K Mid: 215K Min: 172K Deputy CIO and CIO Base salary + maximum incentive lags the market for these two positions. CalSTRS should review the incentive opportunity for the CIO and Deputy CIO as part of the broader compensation review in the work plan. COMP 33

29 Summary of Recommendations 24 As detailed earlier, CalSTRS current pay positioning is below market median for several positions. For positions that are 10% or more below market, our recommendations increase CalSTRS salary ranges and/or and incentive opportunities to be better aligned with its compensation philosophy. Due to the volatile nature of investment management industry pay, we do not believe changes to positions within 10% of market median are needed at this time. However, CalSTRS should continue to monitor its competitive positioning over time for these, and all, positions. CalSTRS Current McLagan Proposed Alternatives Salary Max Salary + Max Bonus Var to Salary Max Salary + Max Bonus Var to Position Min Mid Max Bon Min Mid Max Market Min Mid Max Bon Min Mid Max Market Chief Investment Officer* % 816 1,020 1,224-19% % 816 1,020 1,224-19% Deputy CIO* % % % % Investment Director % % % % Portfolio Manager % % % % Director of Inv. Operations % % % % Associate Portfolio Managers % % % % Chief Executive Officer* % % % % General Counsel % % % General Counsel % % % % General Counsel % % % Chief Operating Officer % % % % Chief Financial Officer % % % % * Salary + Max bonus is significantly below market for the CIO, Deputy CIO, and CEO positions. CalSTRS should review incentive opportunities for these positions as part of the broader compensation review in the work plan. (1)(2)(3) Three alternatives were presented for the General Counsel position, as detailed on page 14 and 15. COMP 34

30 Appendix Comparator Group Details COMP 35

31 Comparator Group Details Investment Positions 26 Leading Institutional Managers Leading Institutional Managers (14) (12/31/15) California Public Employees' Retirement System US Public Fund $289.9 Canada Pension Plan Investment Board Canadian Pension Fund Caisse de depot et placement du Quebec Canadian Pension Fund Ontario Teachers' Pension Plan Board Canadian Pension Fund Teacher Retirement System Of Texas US Public Fund State of Wisconsin Investment Board US Public Fund 92.0 General Motors Asset Management US Corp. Plan Sponsor 87.9 Georgia Employees Retirement System US Public Fund 79.3 Ontario Municipal Employees' Retirement System Canadian Pension Fund 77.0 State Teachers Retirement System Ohio US Public Fund 70.7 Lockheed Martin Investment Management Company US Corp. Plan Sponsor 70.1 Virginia Retirement Systems US Public Fund 66.2 Healthcare of Ontario Pension Plan Canadian Pension Fund 63.9 DuPont Capital Management US Corp. Plan Sponsor 26.9 US Public Fund 6 43% Canadian Pension Fund 5 36% US Corp. Plan Sponsor 3 21% % High Quartile % 88 Median $ % 44 Low Quartile % 26 AUM % Internally Managed # of Inv Staff Private sector asset management organizations of comparable size ($150B to $350B AUM) that are key competitors for CalSTRS staff, includes: Private Sector - 29 Investment Management / Advisory Firms - 8 Insurance Companies - 3 Banks COMP 36

32 Comparator Group Details Executive Positions (67% Leading Public Funds) 27 California Public Employees' Retirement System $289.9 New York State Common Retirement Fund State Board Admin - Florida Teacher Retirement System Of Texas Washington State Investment Board State of Wisconsin Investment Board 92.0 North Carolina Retirement System 86.6 Ohio Public Employees Retirement System 85.9 Georgia Retirement Systems 79.3 New Jersey Division of Investment 71.9 State Teachers Retirement System of Ohio 70.7 State of Michigan Retirement Systems 60.1 PA Public School Employees' Retirement System 50.2 Colorado Public Employees' Retirement Association 39.5 South Dakota Investment Council 10.2 % Internally # of Inv AUM Managed Staff High Quartile $ % 74 Median % 41 Low Quartile % 28 California State Teachers' Retirement System $ % 67 CalSTRS' Rank 2 of of 16 5 of 16 COMP 37

33 Comparator Group Details Executive Positions (33% Broad Private Sector Inv. Mgmt. Orgs.) 28 As indicated below, the private sector peer group includes a broad range of 353 organizations across multiple industry segments. Firms with poor pay practices, as determined by CalSTRS governance staff, were excluded from this peer group. CalSTRS' Private Sector Pay Comparators 12/31/15 AUM (bbs) # of Low High Firms Quartile Median Quartile Investment Management Firms 177 $16.5 $53.0 $155.4 Banks (Investment Management Departments) Insurance Companies (Investment Management Departments) Corporate Plan Sponsors Endowments & Foundations Total 353 $9.2 $31.9 $99.8 COMP 38

34 Appendix Benefits Assumptions and Methodology COMP 39

35 Benefit Assumptions & Methodology 30 Data was analyzed for the following retirement and health benefits: Retirement plans: average of the present value of age benefit accrual for DB and match for DC applicable for each position, service, and pay level. Includes both qualified and nonqualified plans. Active and retiree health: average value of employer provided active health plan during present value of employer provided retiree medical benefits at age 65 divided by years of service at retirement. Key Assumptions Hire Age: 35 Pay Increase: 3.0% Inflation: 2.5% Retirement Age: 65 Medical Trend: 5.0% Discount Rate: 4.5% RP2014 mortality table generationally projected from 2006 using Scale MP-2016 Pre and Post PEPRA determined based on service as of 1/1/2017 Only new hire benefits (not legacy benefits) analyzed for peer group Benefits available prior to age 65, including subsidized early retirement benefits and valuable retiree health benefits, have not been reflected due to the age 65 retirement assumption. This benefit may be quite substantial for CalSTRS, but unlikely to bridge the total rewards gap shown on the following pages. COMP 40

36 Positions Under the CalSTRS Boards' Compensation Setting Authority Total Cash (Salar y + Incentive) Opportunity BASE SALARY POSITION Attachment 2 INCENTIVE OPPORTUNITY MIN MAX MIN MAX CHIEF EXECUTIVE OFFICER $325,000 $475,000 0% 80% CHIEF INVESTMENT OFFICER $408,000 $612,000 0% 100% DEPUTY CIO $272,000 $408,000 0% 80% INVESTMENT DIRECTOR $262,000 $392,000 0% 75% GENERAL COUNSEL (ALT. 2) $281,000 $409,000 0% 20% GENERAL COUNSEL (ALT. 1) $306,000 $444,000 N/A N/A GENERAL COUNSEL (ALT. 3) $281,000 $444,000 N/A N/A PORTFOLIO MANAGER $172,000 $258,000 0% 75% PORTFOLIO MANAGER $164,000 $246,000 0% 75% CHIEF OPERATING OFFICER* $204,000 $296,000 0% 40% CHIEF FINANCIAL OFFICER* $204,000 $296,000 0% 40% SYSTEM ACTUARY $212,000 $308,000 0% 20% DIR INVESTMENT OPRNS $164,000 $246,000 0% 50% ASSOC PORTFOLIO MGR $108,000 $162,000 0% 40% GENERAL COUNSEL $170,000 $252,000 N/A N/A CHIEF OPERATING OFFICER* $123,000 $182,000 0% 15% CHIEF FINANCIAL OFFICER* $123,000 $182,000 0% 15% *Effective these positions are included under the compensation setting authority of the CalSTRS Board. McLagan Recommendations COMP 41 Rev. v