teachers’ retirement board compensation committee …

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: April 6, 2017 / 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 22212.5 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 2016-17 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

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http://www.calstrs.com/sites/main/files/file-attachments/2017_0227_board_policy_manual_updates_february_2017.pdf

http://www.calstrs.com/sites/main/files/file-attachments/2017_0227_board_policy_manual_updates_february_2017.pdf

Compensation Committee Meeting – Item 3 April 6, 2017 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 Attachment 1.

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 2017-18 work plan, proposed in today’s agenda Item # 5.

2. Chief Operating Officer (COO) and Chief Financial Officer (CFO) - Setting base salary and incentive opportunity. Education Code 22212.5 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:

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Compensation Committee Meeting – Item 3 April 6, 2017

(1) Ten percent for the 2017–18 fiscal year. (2) Five percent for any fiscal year subsequent to 2017–18.”

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 2016. 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.

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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, 2017.

4. 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, 2017.

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.

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• 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 2017-18 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 2017-18 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.

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http://www.calstrs.com/sites/main/files/file-attachments/administrative_procedures.pdf

Total Rewards ReviewExecutive and Investment Positions

April 6, 2017

Attachment 1 Compensation Committee - Item 3

April 6, 2017

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2

Introduction

California State Teachers’ Retirement System (CalSTRS) asked McLagan to assess the salary and total cash compensation for nine executive and investment management positions:

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.

Investment Positions Executive Positions*

Chief Investment OfficerDeputy Chief Investment OfficerInvestment Director

Portfolio ManagerDirector of Inv. OperationsAssociate Portfolio Manager

Chief Executive OfficerChief Operating OfficerChief Financial OfficerGeneral Counsel

* Note the the System Actuary position is excluded from this report as it was reviewed at the June 2016 Board meeting.


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Methodology

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).


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Executive Summary

Executive Positions

For the reviewed executive positions, CalSTRS pay positioning is as follows:

‒ CalSTRS base salaries fall below the competitive 25th percentile for all executive positions except the CEO, which is positioned near the median.

‒ Factoring in maximum incentive, CalSTRS remains positioned below the 25th percentile, except for the CEO position, which falls between the 25th percentile and median. Recognizing CalSTRS intends to complete a broader compensation review as part of the 2017-2018 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.


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5

Executive Summary

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 2017-2018 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 25th 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.


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Executive Positions


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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 2017-2018 work plan.

Market positioning and recommendations are detailed on the following pages.

Executive ManagementFindings


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8Executive ManagementBase Salary vs. Market

*CalPERS shown for reference only.

CalSTRS Market CalSTRS Market CalSTRS Market CalSTRS MarketMax / 75th $182 $267 $182 $269 $252 $281 $475 $479Mid / Median 148 239 148 226 205 233 400 404Min / 25th 123 201 123 188 170 192 325 333

CalPERS Mid na 260 276 288

General CounselCOO CFO CEO

$100

$150

$200

$250

$300

$350

$400

$450

$500

Base salary


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9Executive ManagementMaximum Cash vs. Market Total Cash

Base salary + maximum annual incentive


CalSTRS Market CalSTRS Market CalSTRS Market CalSTRS MarketMax / 75th $209 $440 $209 $677 $252 $626 $855 $1,872Mid / Median 170 346 170 350 205 416 720 1,064Min / 25th 141 285 141 243 170 281 585 620

CalPERS Mid na 364 386 404

COO CFO CEOGeneral Counsel

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000


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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.

Executive ManagementTotal Rewards (including long-term, retirement, and health)


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11

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

2,750

3,000

3,250

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

Executive ManagementTotal Rewards (detailed example for CEO position)

746

1,680

768 784 805 834

1,684 1,692 1,702 1,716

CalSTRS’ compensation philosophy is to be competitive with the median total cash

Base Salary

Cash Bonus

Long-Term Incentives

RetirementHealth

CalSTRS Market

na


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12Executive ManagementTotal Rewards (assumes 20 years of service for highest retirement value)

Base salary + annual incentive + long-term incentives + retirement + health

CalSTRS Market CalSTRS Market CalSTRS Market CalSTRS MarketMax / 75th $290 $588 $290 $880 $361 $792 $969 $3,145Mid / Median 242 477 242 471 297 530 834 1,716Min / 25th 203 395 203 334 250 370 699 849

General CounselCOO CFO CEO

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500


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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:

• Maximum incentive opportunity of 40% such that base salary + maximum incentive would be positioned near the competitive median:

Executive ManagementRecommendations

Current Base Salary + Max IncentiveMax: 209KMid: 170KMin: 141K

Recommended Salary + Max IncentiveMax: 415KMid: 350KMin: 285K

Current Base SalaryMax: 182KMid: 148KMin: 123K

Recommended RangeMax: 296KMid: 250KMin: 204K

* 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.


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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:

II. Base Salary + Incentive: increase base salary and include a 20% incentive opportunity to be aligned with the competitive base salary + annual incentive:

Executive ManagementRecommendations …


Proposed Alternative SalaryMax: 444KMid: 375KMin: 306K

Current SalaryMax: 252KMid: 205KMin: 170K


Proposed Salary + 20% Max IncentiveMax: 491KMid: 414KMin: 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.


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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:

CEO

‒ While the base salary for the CEO is market competitive, CalSTRS’ base salary + maximum incentive falls between the 25th percentile and median. For this reason, we recommend that CalSTRS review the CEO’s incentive opportunity during the broader compensation review part of the 2017-2018 work plan.

Executive ManagementRecommendations …




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Investment Management Positions


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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 2017-2018 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 25th percentile). This is driven primarily by long-term incentive compensation within the competitive market.

Market positioning and recommendations are detailed on the following pages.

Investment ManagementFindings


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18Investment ManagementBase Salary vs. Market

$100

$200

$300

$400

$500

$600


Base salary

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 $565Mid / Median 135 140 205 200 205 214 327 250 340 318 510 454Min / 25th 108 120 164 175 164 176 262 225 272 292 408 425

CalPERS Mid 135 na 211 337 na 510

Assoc PM Inv DirDir of Inv Ops PM Deputy CIO CIO


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19Investment ManagementMaximum Cash vs. Market

$0

$500

$1,000

$1,500

$2,000

$2,500

Base salary + maximum annual incentive



Max / 75th $227 $260 $369 $405 $431 $510 $686 $825 $734 $1,300 $1,224 $2,250Mid / Median 189 204 308 315 359 401 572 605 612 822 1,020 1,257Min / 25th 151 172 246 260 287 283 459 474 490 585 816 809

CalPERS Mid 189 na 370 589 na 893

Deputy CIOInv DirAssoc PM CIODir of Inv Ops PM


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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.

Investment ManagementTotal Rewards (including long-term, retirement, and health)


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21Investment ManagementTotal Rewards (detailed example for CIO position)

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

2,750

3,000

3,250

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

1,046

2,263

1,068 1,084 1,105 1,134

2,268 2,276 2,287 2,302

CalSTRS’ compensation philosophy is to be competitive with the median total cash

Base Salary

Cash Bonus

Long-Term Incentives

RetirementHealth

CalSTRS Market

na


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22Investment ManagementTotal Rewards (assumes 20 years of service for highest retirement value)

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500


Max / 75th $304 $405 $476 $556 $476 $705 $800 $1,332 $848 $1,900 $1,338 $3,035Mid / Median 256 277 400 426 400 506 686 938 726 1,394 1,134 2,302Min / 25th 209 216 324 356 324 363 571 631 603 774 930 1,049

Assoc PM Dir of Inv Ops PM Inv Dir Deputy CIO CIO

Base salary + annual incentive + long-term incentives + retirement + health


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Portfolio Manager

‒ To align the Portfolio Managers’ compensation with the market median, CalSTRS could modestly increase base salary as follows:

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 2017-2018 work plan.

Investment ManagementRecommendations


Proposed AlternativeMax: 258KMid: 215KMin: 172K


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Summary of Recommendations

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.

* 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 2017-2018 work plan. (1)(2)(3) Three alternatives were presented for the General Counsel position, as detailed on page 14 and 15.

Max Var to Max Var to Position Min Mid Max Bon Min Mid Max Market Min Mid Max Bon Min Mid Max Market

Chief Investment Officer* 408 510 612 100% 816 1,020 1,224 -19% 408 510 612 100% 816 1,020 1,224 -19%Deputy CIO* 272 340 408 80% 490 612 734 -26% 272 340 408 80% 490 612 734 -26%Investment Director 262 327 392 75% 459 572 686 -5% 262 327 392 75% 459 572 686 -5%Portfolio Manager 164 205 246 75% 287 359 431 -11% 172 215 258 75% 301 376 452 -6%Director of Inv. Operations 164 205 246 50% 246 308 369 -2% 164 205 246 50% 246 308 369 -2%Associate Portfolio Managers 108 135 162 40% 151 189 227 -7% 108 135 162 40% 151 189 227 -7%

Chief Executive Officer* 325 400 475 80% 585 720 855 -32% 325 400 475 80% 585 720 855 -32%General Counsel1 170 205 252 0% 170 205 252 -51% 306 375 444 306 375 444 -10%General Counsel2 170 205 252 0% 170 205 252 -51% 281 345 409 20% 337 414 491 0%General Counsel3 170 205 252 0% 170 205 252 -51% 281 363 444 281 363 444 -13%Chief Operating Officer 123 148 182 15% 141 170 209 -51% 204 250 296 40% 285 350 415 1%Chief Financial Officer 123 148 182 15% 141 170 209 -51% 204 250 296 40% 285 350 415 0%

Salary Salary + Max Bonus SalaryCalSTRS Current

Salary + Max BonusMcLagan Proposed Alternatives


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Appendix – Comparator Group Details


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California Public Employees' Retirement System US Public Fund $289.9Canada Pension Plan Investment Board Canadian Pension Fund 264.6Caisse de depot et placement du Quebec Canadian Pension Fund 248.0Ontario Teachers' Pension Plan Board Canadian Pension Fund 171.4Teacher Retirement System Of Texas US Public Fund 129.9State of Wisconsin Investment Board US Public Fund 92.0General Motors Asset Management US Corp. Plan Sponsor 87.9Georgia Employees Retirement System US Public Fund 79.3Ontario Municipal Employees' Retirement System Canadian Pension Fund 77.0State Teachers Retirement System Ohio US Public Fund 70.7Lockheed Martin Investment Management Company US Corp. Plan Sponsor 70.1Virginia Retirement Systems US Public Fund 66.2Healthcare of Ontario Pension Plan Canadian Pension Fund 63.9DuPont Capital Management US Corp. Plan Sponsor 26.9

US Public Fund 6 43%Canadian Pension Fund 5 36%US Corp. Plan Sponsor 3 21%

14 100%

High Quartile 161.0 87% 88Median $83.6 66% 44

Low Quartile 70.3 38% 26

Leading Institutional Managers (14)AUM

(12/31/15)% 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:

- 29 Investment Management / Advisory Firms

- 8 Insurance Companies

- 3 Banks

Private Sector

LeadingInstitutional Managers

Comparator Group DetailsInvestment Positions


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% Internally # of InvAUM Managed Staff

California Public Employees' Retirement System $289.9New York State Common Retirement Fund 178.3State Board Admin - Florida 176.7Teacher Retirement System Of Texas 129.9Washington State Investment Board 104.9State of Wisconsin Investment Board 92.0North Carolina Retirement System 86.6Ohio Public Employees Retirement System 85.9Georgia Retirement Systems 79.3New Jersey Division of Investment 71.9State Teachers Retirement System of Ohio 70.7State of Michigan Retirement Systems 60.1PA Public School Employees' Retirement System 50.2Colorado Public Employees' Retirement Association 39.5South Dakota Investment Council 10.2

High Quartile $117.4 68% 74Median 85.9 63% 41

Low Quartile 65.4 37% 28

California State Teachers' Retirement System $186.1 39% 67CalSTRS' Rank 2 of 16 10 of 16 5 of 16

Comparator Group DetailsExecutive Positions (67% Leading Public Funds)


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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.

# of Low HighFirms Quartile Median Quartile

Investment Management Firms 177 $16.5 $53.0 $155.4Banks (Investment Management Departments) 62 16.0 43.1 99.8Insurance Companies (Investment Management Departments) 34 17.5 43.2 141.2Corporate Plan Sponsors 24 8.7 22.4 33.2Endowments & Foundations 56 2.4 4.5 8.9

Total 353 $9.2 $31.9 $99.8

CalSTRS' Private Sector Pay Comparators12/31/15 AUM (bbs)

Comparator Group DetailsExecutive Positions (33% Broad Private Sector Inv. Mgmt. Orgs.)


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Appendix – Benefits Assumptions and Methodology


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Benefit Assumptions & Methodology

Data was analyzed for the following retirement and health benefits:

‒ Retirement plans: average of the present value of age 65 2016 benefit accrual for DB and match for DC applicable for each position, service, and pay level. Includes both qualified and non-qualified plans.

‒ Active and retiree health: average value of employer provided active health plan during 2016 + present value of employer provided retiree medical benefits at age 65 divided by years of service at retirement.

Key AssumptionsHire 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.


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Rev. v7.2 | 3.23.2017

Positions Under the CalSTRS Boards' Compensation Setting Authority Total Cash (Salary + Incentive) Opportunity

CHIEF EXECUTIVE OFFICER

POSITION

CHIEF INVESTMENT OFFICER

DEPUTY CIO

INVESTMENT DIRECTOR

GENERAL COUNSEL (ALT. 2)

GENERAL COUNSEL (ALT. 3)

GENERAL COUNSEL

CHIEF OPERATING OFFICER*

CHIEF FINANCIAL OFFICER*

BASESALARY

INCENTIVE OPPORTUNITY

$325,000

$408,000

$272,000

$262,000

$281,000

$281,000

$170,000

$123,000

$123,000

MIN MAX

$475,000

$612,000

$408,000

$392,000

$409,000

$444,000

$252,000

$182,000

$182,000

MAX

80%

100%

80%

75%

20%

N/A

N/A

15%

15%

MIN

0%

0%

0%

0%

0%

GENERAL COUNSEL (ALT. 1) $306,000 $444,000 N/AN/A

N/A

PORTFOLIO MANAGER $164,000 $246,000 75%0%

PORTFOLIO MANAGER $172,000 $258,000 75%0%

DIR INVESTMENT OPRNS $164,000 $246,000 50%0%

CHIEF OPERATING OFFICER* $204,000 $296,000 40%0%

CHIEF FINANCIAL OFFICER* $204,000 $296,000 40%0%

ASSOC PORTFOLIO MGR $108,000 $162,000 40%0%

SYSTEM ACTUARY $212,000 $308,000 20%0%

N/A

0%

0%

*Effective 1.1.2017 these positions are included under the compensation setting authority of the CalSTRS Board.

McLagan Recommendations


April 6, 2017

COMP 41

teachers’ retirement board compensation committee …

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