State of Wisconsin Investment Board (SWIB) Trustees yesterday announced that staff incentive compensation payments totaling $26.0 million to 234 employees will be deferred until the second half of 2023. Although incentive compensation primarily focuses on five-year returns, a longer-term measure that aligns with SWIB’s investment horizon and the period used to calculate retiree adjustments, the Board’s decision is in recognition of the negative return the Core Fund experienced in 2022.
Board policy calls for Trustees to consider deferring incentive compensation payments if the Core Fund return is -10% or lower for the year. The Core Fund, the larger of the two Wisconsin Retirement System (WRS) trust funds with more than $114 billion in assets, ended 2022 with a one-year net return of -12.92%. Awards will be deferred until December 2023 with a portion eligible for payment in August if certain performance thresholds are achieved.
Despite the challenges of 2022, which saw every public market asset class generate negative returns, including the S&P 500 return -18.11% and the Bloomberg U.S. Government/Credit Index return -13.58%, strong absolute investment returns for the Core Fund in three of the past four years will produce a 1.6% positive annuity adjustment for beneficiaries this spring and are expected to provide continued stable employer and employee contribution rates in 2024.
In deferring the incentive compensation awards, Trustees sought to balance the Core Fund’s 2022 performance with the recognition of staff who worked diligently to weather the negative return environment to find opportunities to maximize long-term returns at a prudent level of risk. Over the past five years, SWIB’s investment management has added value to the WRS trust funds of more than $2.7 billion above benchmark returns. The Core Fund’s 10-year and 20-year returns net of external manager fees continued to exceed the Core Fund’s target return of 6.8%. SWIB outperformed its benchmarks for all time periods.
“The Board’s decision to defer incentive compensation aligns staff outcomes with the results for WRS participants,” SWIB Board of Trustees Chair Barbara Nick said. “The volatile negative return environment of the 2022 financial markets impacted our beneficiaries. However, Trustees also wanted to acknowledge the results generated by staff over the past several years that grew and protected the trust funds. Those efforts will help keep the WRS among the only fully funded public pension plans in the country.”
Incentive compensation equates to less than 5% of SWIB’s costs for managing the WRS and is the pay-for-performance part of employee compensation. Incentives are awarded based on an employee’s contributions to the overall success of the organization and trust fund performance after deduction of all costs. Incentives are based on delivering value above industry benchmarks set by the Trustees with the help of an outside independent consultant, a practice used throughout the industry. The plan sets total compensation targets using peer group data. Compensation to SWIB employees provides a considerable cost savings advantage for the WRS over the fees charged by external investment managers. According to an independent cost consultant, SWIB’s costs for 2021 were $91 million lower than the U.S. public pension fund average, and SWIB has saved over $900 million of costs compared to its peers in the last 10 years.
SWIB Trustees also granted long-term incentive units to senior employees, who constitute less than one-third of staff, that will be eligible for payment beginning in the second half of 2024. Long-term incentives are a common component of industry compensation that promote the recruitment and retention of critical staff and further align employees with the interests of WRS beneficiaries, as the value of the units is determined upon vesting based on the long-term performance of the Core Fund.
The State of Wisconsin Investment Board (SWIB), created in 1951, is an independent state agency responsible for managing the assets of the Wisconsin Retirement System (WRS), the State Investment Fund (SIF), and other state trust funds. As of December 31, 2022, SWIB managed $143 billion of total assets, 85% representing WRS assets. SWIB’s strong management of the trust funds has helped the WRS remain one of the only fully funded U.S. public pension plans. SWIB provides a strong, steady economic pillar for the state of Wisconsin by growing the trust funds under its management, managing risk, and optimizing costs over the long term.