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Pension fund bonuses under scrutiny

Agency lost money over review period

At a time when few public employees are getting raises, the agency that manages the state’s pension fund has earmarked more than a quarter of a million dollars for staff bonuses, including a possible $33,000 payment to the executive director, according to internal documents.

The bonuses, awarded through a performance-based compensation system adopted four years ago, are tied to a three-year period ending in June. During that time, the fund, which started at $50.2 billion, suffered deep losses before rebounding to $45.6 billion.

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The compensation is based on investment benchmarks set by the Pension Reserves Investment Management (PRIM) board and not entirely on the fluctuating value of the fund.

The total amount of the bonuses is $267,328, most of which has already been paid. That represents 11.1 percent of the total staff salaries, according to documents obtained by the Globe, and comes just months after the agency handed out $152,000 in raises to its 25-member staff.

The agency’s top two executives will receive their extra pay over two years, a total of 14 percent if the fund meets benchmarks for one more fiscal year.

Executive director Michael G.Trotsky, who is paid $245,000 a year, will receive $33,238.

Similarly, the agency’s chief investment officer, Stanley P. Mavromates Jr., who has the same salary, will collect $34,780. Trotsky has only worked at the agency since August 2010, or less than a third of the period covered by the three years that bonuses are based on.

‘These people must be living in some sort of bubble.’

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State Treasurer Steven Grossman, who chairs the PRIM board, said the agency is reviewing whether to continue the controversial incentive compensation system, which also awarded bonuses in 2008. He said he will await judgment until the board’s compensation committee, which was created just after he took office in January, completes its review. The staff has not had raises since 2006.

But he said the central argument in support of the pay system is that PRIM must consider the competition it faces from the private financial world to attract and keep top talent.

“Recruiting and retention of top flight managers is a major issue,’’ Grossman said. “This is not Wall Street. Anyone who wants to make Wall Street money should go to Wall Street - or State Street. We have to consider the importance of recruiting and retaining the most talented people we can find.’’

But some of those who received extra pay have little to do with investment policy.

For example, Trotsky’s secretary, Samantha Wong, got a $4,828 bonus. She has only worked at the agency for little more than a year. She also received a 3.3 percent raise. Another administrative assistant, Alyssa Smith, saw her $44,000 salary increase to $54,000, a 22 percent hike, along with a $4,884 bonus.

Trotsky said both women’s responsibilities had been expanded.

The bonuses come at a time when the public debate, both here and across the country, has focused on widening income gaps, large corporate payouts, and the economic struggles facing the middle class. Massachusetts has seen thousands of teachers, public safety officers, and others laid off or their benefits slashed because state and local governments are making sharp budget cuts.

“These people must be living in some sort of bubble,’’ said David J. Holway, president of the National Association of Government Employees, the union that represents 22,000 state, local, and county workers in Massachusetts.

“For these highly paid individuals to have a payment scheme that gives them huge bonuses for their performance is totally outrageous. Obviously, they haven’t gone by Occupy Boston to see how people are feeling about how the rich are getting richer and the working families are struggling.’’

He said his union is demanding that Grossman rescind the policy.

Trotsky defended the bonus system, saying the pension fund had its second best year ever in the fiscal year that ended in June, in terms of its asset growth. He also said that the fund, when compared to other large public funds nationally, is in the top third in terms of performance, but is in the bottom quarter in terms of pay.

He said paying this amount of money in bonuses to generate high returns is money well spent.

Under the bonus system, pension fund employees can collect bonuses amounting to 30 to 40 percent of their salaries if they meet or exceed benchmarks over a three-year period. The last time the fund gave out bonuses was in September 2008, based on the three-year period ending the previous June 30. At that time, the fund was valued at $50.6 billion. It dropped to $37.6 billion the following year and then rebounded slightly to $41.2 billion by June 2010.

Under the incentive compensation plan, the bonuses kick in when the fund’s performance exceeds the returns of the investment indexes that reflect the mix of the pension fund’s assets. If the decline in the fund’s value is less than the indexes, the agency’s staff can earn bonuses according to a specific performance scale. But if the indexes are not met, the employees do not get the extra money, even if the fund’s assets increase.

The plan was devised by PRIM’s former executive director Michael Travaglini, who argued that the system promoted value rather than conservative investment strategies. He quit his post in 2010 to join a Chicago investment firm when the Legislature appeared ready to sharply curb the performance bonuses. He had earned a $68,000 bonus in 2008. He said he wanted to go to the private sector and make more money to provide for his family

His departure came in the midst of a political advertising campaign by the Republican Governors Association aimed at Timothy P. Cahill, then state treasurer and an independent candidate for governor.

The ads attacked Cahill for his role as chairman of the PRIM board when it approved large bonuses despite steep losses in 2008.

Frank Phillips can be reached at phillips@globe.com.

Correction: Because of a reporting error, the original version of this story misstated the value of the state pension fund on which the raises for staff members at the Pension Reserves Investment Management Board agency were based. The value as of June 2011 was $50.2 billion.

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