The Boston Globe reported Friday that staff at the Massachusetts state pension fund will be receiving a "huge" bonus package worth 20% of total 2012 payroll. The Globe was skeptical, because the fund lost value last fiscal year and some bonuses went to staff with no direct investment responsibility, such as the executive director's secretary and the general counsel.
That was the story's lead, but other elements of the Massachusetts bonus program sounded perfectly reasonable.
The executive director's base salary is $245,000. Even with his $98,000 bonus, this is below-market compensation, benchmarked against what Wall Street would pay someone to run a $50 billion fund. Given the public sector's normal bias towards above-market compensation, why begrudge an extra $100,000? Furthermore, this is pay for performance. (To be clear, though the fund was down in the most recent year, the bonus program uses a three-year performance benchmark, which the fund has exceeded.) Pension fund managers' performance is easy to quantify and, since they're non-union, pay for performance is easy to implement.
Thus, the Massachusetts bonus program has many commendable features. But its appropriateness depends on whether competence or excellence is the appropriate standard for public servants.
In K-12 public education, there are currently wars being fought over instituting merit pay, to reward and promote excellence, and ending tenure, to eliminate incompetence. The latter effort is more important because its ultimate goal is much more realistic. In America, the challenging and lucrative opportunities in the private sector are simply too abundant for excellence to function as a general principle among public servants.
Teach for America is the highly successful exception that proves this rule. TFA has found that, in order to maintain low selectivity rates, it can't ask people to commit beyond more than two years. TFA takes great pride in its vast alumni network's continuing advocacy for K-12 reform, but it is legitimate to wonder if the organization should not do more to retain teachers for longer. Maybe it could, but requiring longer commitments would likely cause fewer to apply and TFA's acceptance rate to rise.
Research about teacher quality supports the notion that competence, short of excellence, can give us the public education system we want. Stanford University's Eric Hanushek has shown that if we could simply replace the bottom 5-10% of teachers with basically competent teachers, our international test-score rankings would move from below-average to near the top.
As for public pension managers, if it's true that government will never be able to attract and retain top financial talent, then perhaps a system of flat compensation, such as used by the state of New York, is better than bonuses. Managers can always be fired for unsatisfactory performance (again, they're non-union), or for failing to meet the basic standards of competence, honesty and commitment. To hold managers to higher standards could provoke a range of unintended consequences. They might take on greater investment risk, which could cause spectacular losses or spectacular returns, which might then open up new opportunities and tempt them to leave. And, by all means, let's avoid doing anything to strengthen the already grossly-exaggerated opinion that many public pension systems and administrators have of their importance to American civilization. Whatever happened to the low-but-solid principle of "stewardship"?