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Pension board OK’s contentious bonus pay plan

In a narrow 5-to-4 vote, the board of the Massachusetts state pension fund approved a compensation plan Tuesday that will increase bonuses for investment staff and introduce new hurdles for earning them, while rejecting others proposed by Treasurer Steve Grossman.

Michael Trotsky, the $50 billion fund’s executive director, said the new plan would give him the tools to compete for top hires — something the pension fund has long struggled with, and which contributed to a slew of vacancies this year. He also vowed to cut expenses elsewhere in his $300 million budget.

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“I want to save $100 million,” Trotsky said, noting that the “real money” is in fees paid to consultants and Wall Street firms, including hedge funds. By contrast, only 1.5 percent of the budget, or about $4.5 million, is devoted to staff compensation.

“I need talented people to be able to replace Wall Street salaries,’’ Trotsky said.

But the vote, which followed more than a year of debate, was not without controversy.

Some meetings were heated, and politics were often at play. Grossman and Governor Deval Patrick’s board representatives worried about the public’s reaction to raises at the Pension Reserves Investment Trust at a time when the state could be facing budget cuts.

Theresa McGoldrick, a director who represents 3,500 unionized employees in the executive branch and the Trial Court, voted against the new pay plan, rejecting the idea of bonuses outright. “Performance-based incentive compensation does not have a place in state government,’’ she said at the meeting.

The new plan, slated to take effect Jan. 1, would expand the number of top investment jobs eligible for 40 percent bonuses, while cutting bonuses for 16 out of 24 staffers who aren’t involved in managing money. The latter would get raises to make up part of the difference.

In addition, the new plan introduced an individual performance component to bonuses and established a peer group against which to measure pay, based on other similarly sized funds.

Grossman, who is chairman of the pension board, voted against the plan because it lacked three provisions he supported.

He had pushed for bonuses to be linked to the fund’s long-term 8 percent annual return goal, because, over time, a failure to deliver that will mean taxpayers have to cover the shortfall.

Grossman also had wanted to defer bonuses in years when the fund loses money, even if the staff outperforms the market and their benchmarks.

“I’m not comfortable paying bonuses after a down year,” he said. The board instead reserved the right to hold the bonuses, but didn’t make the deferral mandatory.

Currently, the fund must beat its benchmark return by 0.75 percentage points for staff to earn bonuses. Grossman wanted to keep that level, but the committee recommended 0.60 points, closer to the industry average, and the board agreed.

The fund’s return was essentially flat last fiscal year, falling 0.1 percent. It’s up 10.5 percent so far in this calendar year, 0.5 points ahead of the benchmark.

Beth Healy can be reached at bhealy@globe.com.
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