CIO SUMMIT. Building a Performance Driven Investment Culture Motivating Change and Getting the Results You Need. Presented by: June 14, 2018

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1 CIO SUMMIT Building a Performance Driven Investment Culture Motivating Change and Getting the Results You Need June 14, 2018 Presented by:

2 Today s Presenters Brad Kelly Peter Landers Partner Partner brad.kelly@ggainc.com peter.landers@ggainc.com (416) (416)

3 What We Historically Advocate How can public funds reduce their deficits? Increase Contributions Decrease Benefits Improve Governance Increase Investment Returns Decrease Operating Costs X X 3

4 Poor Governance Oversight Costs A Lot! (2007) The State Of Global Pension Fund Governance Poor Governance can cost pensions 1 to 2% annually Governance improvements should be a priority 1. Financial oversight 2. Board composition and skills 3. Board evaluations 4. Clarity in board and management roles 5. High performance cultures with competitive compensation Ambachtsheer, Capelle, and Lum The State Of Global Pension Fund Governance Today 4

5 Decreasing Operating Costs is a Simple Concept Grow Savings Find Savings Invest Reinvest Savings 5

6 What Should You Focus On When Building Your Team? Abraham Maslow s Hierarchy of Needs,

7 Determine What is Fair Select a Defensible Peer Group Comparisons should be similar Peer group or market data should be comprised of organizations that are: Of similar size (e.g. Assets under Management, # of employees, etc.) Similar sector (e.g. Pension funds, investment managers, etc.) Similar region The positions should be: Similar in scope Similar responsibilities Overall, it is very important to know what your peers are doing. 7

8 Compare Against Similar Roles in Similar Organizations Leading U.S. Public Pension Funds: Name Ted Eliopoulos Chris Ailman Britt Harris Ashbel Williams Jr. Thomas DiNapoli Organization (Title) CalPERS (CIO) CalSTRS (CIO) Texas Teachers (CIO) Florida State Board (Executive Director & CIO) New York State Common (Comptroller) Recent Comp. (Thousand)* Assets (Billions) $768.3 $320.0 $651.0 $202.8 $551.3 $134.0 $411.0 $189.4 $151.5 $178.6 Publicly available data inconsistent between funds. For CalPERS and CalSTRS, reflects total 2016 compensation. For three additional funds, data is limited due to insufficient public disclosure. Source: Global Governance Advisors Tabulations from recent public disclosures 8

9 Compare Against Similar Roles in Similar Organizations Leading Canadian Public Pension Funds: Name Michael Latimer Ron Mock Mark Wiseman André Bourbonnais Michael Sabia Organization (Title) OMERS (CEO) OTPP (CEO) CPPIB (CEO) PSPIB (CEO) Caisse de depot (CEO) Recent Comp. (Thousand)* C$5,202.3 C$4,088.0 C$3,628.0 C$3,285.8 C$2,821.7 Assets (Billions) C$85.4 C$175.6 C$278.9 C$116.8 C$270.7 * Includes base salary, bonuses, long-term incentive paid and other compensation. Source: Global Governance Advisors Tabulations from recent annual reports. 9

10 Compare Against Similar Roles in Similar Organizations Leading U.S. Money Managers: Name James Dimon Laurence Fink Lloyd Blankfein Gerald Hassell Joseph Hooley Organization (Title) JP Morgan Chase (CEO) BlackRock (CEO) Goldman Sachs (CEO) BNY Mellon (CEO) State Street (CEO) 2016 Pay (Thousand)* * Includes base salary, bonuses, incentive or variable pay, pension, and all other compensation Assets (Billions) $27,236.9 $1,771.0 $25,472.8 $5,147.9 $20,206.9 $1,379.0 $19,165.6 $1,648.0 $14,691.8 $2,468.0 Source: Global Governance Advisors Tabulations from recent Form DEF14A disclosures. 10

11 Make Sure You Are Competitive How can I ensure that I am market competitive? How will the staff know that their compensation is competitive? Am I being (or will I be) compensated fairly? 11

12 To Motivate the POSITIVE Behaviors & Avoid NEGATIVE Behaviors. You NEED a Performance Management Plan 12

13 Positive Performance Management Plans Are clear on expectations and process Promote buy In Based on influence Assess attainability Are simple Rely on strong communication Are renewable Are affordable 13

14 Performance Objectives & Targets Objectives and targets in a balanced scorecard can be tested against the mnemonic SMARTER: Specific Measurable Attainable Relevant Time-Bound Ethical Risk Weighted (Source Global Governance Advisors) 14

15 Determining Merit Salary Increases Evaluation tool maybe required Include specific performance criteria for a given year and Evaluate performance against criteria Determine whether salary increase is warranted Leadership criteria is commonly incorporated for anyone in a management position 15

16 Determining Merit Salary Increases Specific areas to be considered when determining merit salary increases: Overall cost Establish a total salary budget pool Allocated to both merit increases and lump sums Individual performance rating for each team member Market assessment information (if available) Internal equity of employees in the team Review/understand the impacts of any adjustment relative to other employees salaries in the same position 16

17 Determining Merit Salary Increases Additional areas to be considered when determining merit salary increases: Placement of salary within pay band If the current salary is above the pay band maximum the employee will not be eligible for a base salary increase May be considered for a merit lump sum depending on performance Pay gap between a developing and fully competent employee relative to their experience, capabilities, and performance Proficiency in job coupled with length of time in job The leadership qualities demonstrated by the manager 17

18 Merit Salary Increase Evaluation Tool Performance Rating Far Exceeds Expectations Definition Executive exceeds all performance expectations and is viewed by senior leadership and Trustees as an outstanding contributor. Participates in relevant and worthwhile professional organizations. Executive exceeds all key performance objectives and all other job expectations and accountabilities. Executive models core values by treating all others with respect, fairness, trust and dignity. Executive provides solid leadership to the organization and projects a positive image of fund. Merit Range 5%+ Exceeds Expectations Successfully Meets Expectations Partially Meets Expectations Does Not Meet Expectations Executive exceeds many performance expectations and willingly takes on work above and beyond current job responsibilities. Participates in relevant and worthwhile professional organizations. Executive exceeds many key performance objectives and many other job expectations. Executive models core values by treating all others with respect, fairness, trust and dignity. Executive provides solid leadership to the organization and projects a positive image of fund. Executive successfully meets performance, job expectations and accountabilities and participates in professional organizations. Executive meets key performance objectives Executive models core values by treating all others with respect, fairness, trust and dignity. Executive provides leadership to the organization and projects a solid image of fund. Executive needs improvement, or does not meet some performance expectations and job accountabilities for the position, for someone with this training and experience. Executive does not meet some (or any) key performance objectives OR Executive may meet all defined performance objectives and expectations and accountabilities of the position, however, in many cases does not demonstrate professional behaviour or core values of treating all others with respect, fairness, trust and dignity. Executive does not meet performance expectations of position & requires substantial improvement. Continuation of employment subject to improved performance. A formal action plan is mandatory. 3% 5% 1% 3% 0% 1% 0% 18

19 How to Position Talent within Salary Bands Provided below is rationale that can be used in deciding where to position new hires and other roles within salary bands Band Position Incumbent/Market Characteristics Above Band Midpoint At or Around Band Midpoint Below Band Midpoint Sustained High Performer with proven track record in current or similar role Promotion opportunities currently limited within organization Hot job market with low supply of talent Fully competent in role Solid performer who Meets Expectations 4+ years in current or similar role Relatively stable job market with good supply of talent Entry-level (first 1-3 years in current or similar role) Limited experience in role Below Average performer Slow job market with high supply of talent 19

20 Performance Incentive Plans How Many of you Offer Incentives? Are They Designed to be Effective? Incentive Objectives: Align investment team and fund objectives Help articulate the line of sight between the actions of the team and the fund s objectives Provide an opportunity for competitive compensation Provide a clear, consistent basis for determining compensation Reward results as well as effort Communicate fund strategy as understood by the Board and the team 20

21 Use Strong Carrots Tiered levels clearly incent performance 150% Rewards Effort 50% Threshold Award 100% Target Award Superior Award Incents Performance 21

22 Target Incentive Hurdle Achievements 150% Levered Plan Design Target plus/minus approach Typically communicated as a percent of Target Rewarded for outperforming Take Away Plan Design Maximum payouts communicated 50% Threshold Award 100% Target Award Superior Award 100% Target (Max) Clear expectations outlined for the role Avoids confusion around what superior performance is 0% Min. Award 22

23 Justifying the Need for Incentives The Funding Dilemma Incentives should be self funded Always use a percentage of savings / revenue Savings/Returns Money Net Benefit Incentive Performance Savings and/or higher returns will ALWAYS outweigh the total incentive expense. 23

24 Clear Messaging on Benefits is Important Strategic messaging may be required Determine the value of the performance Communicate the scope of the responsibility Identify member/stakeholder benefits Risk is on the employee Incentives will NOT pay out unless positive performance is achieved! Value Sharing Ratio One-Time Payout Ongoing Member Benefit 24

25 Performance Scorecards Provide Clarity Position Threshold (1) Target Superior (1) Chief Investment Officer $0 $100,000 $150,000 Performance Targets Potential Payout Levels Performance Measures Weighting Threshold Target Superior Threshold Target Superior (0% Payout) (100% Payout) (150% Payout) (0% Payout) (100% Payout) (150% Payout) Total Fund Performance Value Add Return of Total Fund over Benchmark 50% +0 bps +40 bps +80 bps $0 $50,000 $75,000 Asset Class Performance Value Add Return of Equities over Benchmark 15% +0 bps +60 bps +120 bps $0 $15,000 $22,500 Value Add Return of Fixed Income over Benchmark 10% +0 bps +20 bps +40 bps $0 $10,000 $15,000 Individual Performance Succession Planning for Investments Division 10% $0 $10,000 $15,000 Updating Investment Philosophy 10% Partially Met Objectives Fully Met Objectives Exceptional Contribution (Rating of 2) (Rating of 3) (Rating of 4) $0 $10,000 $15,000 Risk Management 5% $0 $5,000 $7,500 Below Threshold = 0% Payout Opportunity (% of Target) 0% 100% 150% $0 $100,000 $150,000 (1) Threshold and Superior payout multipliers are 0% and 150% of Target respectively. Incentives SHOULD NOT pay out unless positive performance is achieved! 25

26 Process is Important Engagement is Key Design Strategy & Business Objectives Define Targets Perfect Administration Incentive Design Buy In Risk Assessment Stress Test Board Approves Design Performance Evaluation Board/Government Oversight Payout Evaluation 26

27 What Does Effective Motivation Lead to? 27

28 The Impact of What We Know YOU WILL BE SUCCESSFUL IF YOU FULLY UNDERSTAND THE FULL EXTENT OF WHAT YOU ARE OFFERING PAYING FAIRLY AND COMPETITIVELY INCREASES YOUR ABILITY TO ATTRACT & RETAIN THE TALENT YOU NEED OFFERING INCENTIVES FOR MEASURABLE PERFORMANCE POSITIVELY IMPACTS YOUR ABILITY TO REALIZE FINANCIAL SUCCESS YOU NEED TO FULFILL YOU PENSION PROMISE 28

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