Nov. 30—BISMARCK — An incentive compensation program could allow the top two officials in the North Dakota Retirement and Investment Office to earn up to 100% of their salaries as incentive compensation, but officials in the office say that might not happen every year.
"We're assuming you're not going to hit your benchmarks every time," said RIO Executive Director Jan Murtha, who has submitted her resignation from her position. Her last day will be Jan. 3, the North Dakota Monitor reported.
RIO Chief Investment Officer Scott Anderson said if the employees don't perform well with investments, their incentive compensation will not be paid at the same level.
"The challenge is, if you pay everybody's salary at market salary, some are going to outperform, some are going to underperform," he said. "The ones that outperform are going to be paid adequately. Ones that underperform are going to be overpaid. So with the incentive comp plan, we were able to have a lower-cost incentive for the investment staff."
Anderson said having internal investment managers saves RIO about $16 million per year for internally managing 15% of the state's assets.
"That's after costs, after the salaries, after an incentive comp plan, after the infrastructure to make this work," Anderson said. "My budget is five times less than the amount that we're going to save for the entire team. ... It's a big savings."
The first 15% of investments will be moved to internal management next year, said Sarah Mudder, RIO communications and outreach director. She said RIO would like to move 50% of investments in-house.
The estimated annual savings is $45 million per year for internal management of 50% of assets, according to a PowerPoint slide provided by RIO. The estimated annual savings for managing 15% and 50% of the assets internally is based on RIO having $20 billion in assets under management. RIO currently has $23 billion in assets under management, Mudder said.
The incentive compensation program went into effect July 1.
The salary is over $237,000 per year for Murtha. Anderson's salary is $312,000 per year.
Murtha and Anderson currently are not receiving incentive compensation, Mudder said. Once the internal investment initiative is up and running, Murtha and Anderson will both be eligible for the incentive compensation.
The incentive compensation plan provides payment of incentive compensation awards to full-time-equivalent investment and fiscal operations positions necessary for the management of investment of funds under the control of the State Investment Board, according to the State Investment Board program manual. The manual says the plan supersedes all prior incentive compensation plans and/or arrangements for participants.
"Participants under this Plan include all unclassified investment services related staff as may be determined by the SIB (State Investment Board), ERCC (Executive Review and Compensation Committee), and Executive Director," the manual says.
The compensation plan applies to 20 full-time-equivalent positions in the Retirement and Investment Office, according to budget No. 190 of Senate Bill 2022.
During the 2023 legislative session, the state Legislature authorized the Retirement and Investment Office to develop an incentive compensation program for its investment and fiscal operations positions necessary for the management of funds under the control of the State Investment Board.
In 2023, the Legislature approved 34 full-time-equivalent positions for the Retirement and Investment Office for the 2023-25 biennium, an increase of nine full-time-equivalent positions from the 2021-23 biennium. The Legislature added two full-time-equivalent investment assistant positions, five full-time-equivalent investment positions, one full-time-equivalent fiscal position and one full-time-equivalent administrative position.
Section 5 of SB2022 created a new section to North Dakota Century Code 54-52.5 relating to an incentive compensation program for investment and fiscal operations positions.
North Dakota Century Code Chapter 54-52.5 says that the North Dakota Retirement and Investment Office may develop an incentive compensation program for full-time-equivalent investment and fiscal operations positions necessary for the management of the investment of funds under the control of the State Investment Board. The State Investment Board must approve annually the provisions of the program.
"The provisions must ensure that the payouts do not occur unless the risk-based performance of the investments that are internally managed exceed the risk-based performance of policy benchmarks," the Century Code says. "Any amounts paid under this program must be considered compensation and not personal profit on behalf of the employee."
Section 3 of SB2022 during the 2023 legislative session amended North Dakota Century Code Section 54-44.3-20 to exempt investment and fiscal operations positions of the Retirement and Investment Office staff from the state employee classification system.
Rep. Mitch Ostlie, R-Jamestown, said most state employees are not classified that way to get those kinds of bonuses.
For RIO to manage 15% of the state's assets internally, Murtha said the office needed to add more people with the expertise to manage those assets.
"That is going to require, again, what other states have done, which is have incentive top as part of it," she said. "These roles and the way this investment program is evolving, there aren't similar roles in other state agencies. So they are now different ... . And so in order to be able to hire people and be able to implement an internal investment initiative that also has this incentive comp program, these roles wouldn't fit within the classification system of the state because they're similar to other agencies, and so that's why we needed to be able to have these roles exempt from that classification so that they could be properly identified."
The documents of the plan says it is designed to:
* Help attract and retain talented investment professionals.
* Help RIO earn the highest possible investment returns at a reasonable cost and at controlled levels of risk.
* Reward long-term investment performance.
* Reflect the RIO client fund above-benchmark, net of all performance.
* Motivate staff to make good decisions for RIO client funds, including implementation decisions related to asset allocation.
* Foster a collaborative approach to investing RIO's assets under management.
* Reward measurable and achievable performance.
* Be clear and easily communicated in terms of the Plan's objectives, design features and associated incentive compensation opportunities.
* Be perceived as fair by RIO's employees and potential recruits.
Anderson said the plan was designed to recruit and retain employees.
"I think our staff is very driven by the mission of our client fund, and is really enthused about our commission of our client funds, but to be a good employer, you want to pay people what the market is and you want to attract the best people when you want to retain the best people," he said. We're not trying to pay more, and we don't want to pay less because we feel like we wouldn't be able to retain the people."
Murtha said Mercer completed a compensation survey to see how the plan compares to other markets and provided recommendations for the incentive compensation plan.
The State Investment Board's Executive Review and Compensation Committee selected Mercer in August 2023 through a public process, Mudder said.
The State Investment Board approved in a 10-3 vote the incentive compensation program in February. Board members Adam Miller, Joe Morrissette and Susan Sisk were opposed.
A request for the video for the February State Investment Board meeting was not available with Mudder citing North Dakota Century Code 44-04-19.2(5). The Jamestown Sun plans on filing an attorney general opinion on whether the video should be available.
The State Investment Board is responsible for the administration of the Legacy Fund, according to the Retirement and Investment Office's website.
Plan participation is determined based on employment status and the executive director's assessment of the position's impact on the Retirement and Investment Office's overall investment performance.
The incentive compensation plan provides incentive compensation as a percentage of regular compensation with 80% of the incentive compensation based on the financial performance of the investments and 20% based on individual goals, according to the Retirement and Investment Office's budget No. 190 for SB2022. If the three-year rolling average return of the investments exceeds the benchmark return by 0.5%, 100% of the incentive compensation based on financial performance is available to the employees, the document says.
The maximum incentives as a percentage of regular compensation are as follows:
* 100% for the chief investment officer and executive director.
* 90% for the deputy chief investment officer.
* 75% for the chief risk officer, senior investment officers, and portfolio managers.
* 60% for the chief financial officer.
* 50% for investment officers, risk officers and accounting managers
* 25% for senior investment accountants and investment accountants
The Retirement and Investment Office's practice for plan eligibility includes direct management and investment positions which is more inclusive than the market practice, according to Mercer's review of the plan.
"Eligibility is typically extended to the Top Investment Officer through Senior Investment Analyst, however, only about 50% (of) the market provides incentives to all investment positions," Mercer's review says.
The incentive compensation plan allows more than just the investment advisers to be eligible for the plan and includes the executive director and the fiscal team of the Retirement and Investment Office, said Morrissette, incoming director for the North Dakota Office of Management and Budget. All employees in RIO are not eligible for the plan, he said.
"What I had said at the board meeting was I don't know the market for professional investment advisers or what we have to pay them, but I know the market for state agency leaders having spent five years as the OMB (Office of Management and Budget) director," he said. "I felt like that creates a huge disparity in compensation structure within state government. I didn't feel like it was appropriate for the executive director to be part of that."
Morrissette said the plan's structure allows the fiscal team to get 25% to 60% of their salary as incentive compensation.
"I felt like that wasn't appropriate, that we're not competing with Wall Street for these folks," he said. "They, for the most part, have come from other state agencies for a base-level salary that's already very competitive. That's why they went there. To have this kind of a bonus structure creates a huge disparity among the fiscal team and state government."
If investment decisions continue to lose money for the state, the employees won't be able to continue in those roles, he said.
Miller said the executive director was also the chief investment officer in the past. A few years ago, he said the position was split into two, removing the investment duties from the executive director position.
"Based on that and based on what the law says regarding the bonus structure, it didn't appear to me that Jan wasn't entitled to receive any bonus compensation under that law," he said.
The executive director's job description shows it no longer includes administering the investment program of the office under the position's essential functions. The plan says the executive director will administer the incentive compensation plan.
Murtha said legislation authorizing the incentive compensation plan is for all full-time-equivalent investment and fiscal operations positions necessary for the management of the investment funds.
"All the team members that contribute to the outcome are necessary for achieving good performance," she said. "So that was why it was written that way. It was for those professionals to be able to be eligible."
In order to build the incentive compensation plan from the beginning, Murtha said the entire RIO team is needed to implement it.
Morrissette said he was also against the structure of the bonus system because the plan awards a bonus at one basis point of performance that exceeds the benchmark.
"A basis point is a 100th of a percent," he said. "That seemed like too small of a margin for me. I felt like there should be a larger gap between the benchmark and what our performance is before we started awarding bonuses."
Anderson said an independent benchmark consultant was hired and the benchmarks were approved by the State Investment Board. He also said an independent performance consultant was hired to regulate the performance of the staff. He said that consultant also compares the staff's performance to the performance of the benchmark.
"The staff isn't determining the benchmark and isn't determining what that performance is, and it's calculated by an independent party," he said.
He said when investors are investing against the benchmark, half of them will beat the benchmark and half won't.
"So it's really zero, and we set the expectation as 25 basis points higher than zero, because we feel a good institutional investor should do better than average," he said. "So we were saying the median of good investors should be 25 points. We're targeting 25 basis points. We max out at 50 basis points. So it's a process where I think it was appropriately conservative, appropriately independent, appropriately based on market information."
