FROM: Debby Cherney, Chief Executive Officer
SUBJECT: Investment Team Incentive Compensation
RECOMMENDATION:
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Approve the addition of the Deputy Chief Investment Officer to the updated framework for Investment Officer incentive compensation, effective with FY 2025-26.
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BACKGROUND:
Since 2015, SBCERA approved and implemented an Incentive Compensation Plan which included the Chief Investment Officer (CIO) and Senior Investment Officer (SIO) positions as eligible for this compensation. On May 5, 2022, the Board extended the Incentive Compensation Plan to the Investment Officer (IO) classification. At its July 2025 meeting, the Board approved the addition of the Associate Investment Officer to the framework.
The Current Incentive Compensation Plan Framework:
The Chief Investment Officer has a target 50% incentive compensation, the Senior Investment Officers have a target 30% incentive compensation, the Investment Officers have a target of 20% and the Associate Investment Officers have a target of 12% incentive compensation.
Each award has quantitative elements:
1. Fund Performance
a) Excess return over policy benchmark - a straightforward measure of how well staff executes versus the policy benchmark using the formula of our fiscal year rate of return (net) vs. the policy index approved by the Board.
b) Absolute return over the stated return - how well the plan executes the mission of achieving the stated return which is currently SBCERA’s assumed rate of 7.25%.
2. Risk Components
a) Alpha generation - How well staff executes versus policy
benchmark.
b) Sharpe ratio - Absolute return focus.
3. Peer Comparison
a) Risk
b) Return
c) Median with investment consultant universe metrics for Sharpe ratio and Alpha
4. SBCERA Implementation Benchmark
a) The Implementation Benchmark is calculated quarterly by NEPC and is based on a weighted average of the returns obtained from representative universes of asset classes in SBCERA’s investment portfolio. A measure of staff’s execution of the Asset Allocation ranges adopted by the SBCERA Board.
The elements incorporated into the Compensation Scorecard include qualitative scores from the Board, CEO, and/or CIO. Among the considerations are:
1. Overall performance evaluation
2. Department management (where relevant)
3. Cohesion with management team
4. Executive of strategic plan and priorities
5. Execution and monitoring of policy
6. Activity and performance in industry groups, representing SBCERA at industry events as a speaker or panelist
7. Learning and growth
8. Board and Committee interactions
Considerations for Potential Changes to the Framework:
With the recent addition of the Deputy Chief Investment Officer (DCIO), staff recommend that the committee consider inclusion of this position in the Incentive Compensation Plan framework with a target 40% incentive compensation. A copy of the proposed rubric for the incentive compensation for each of those classifications is attached as Exhibit A with the redlines calling out the components for the DCIO.
Implementing Changes for FY 2025-26 and Beyond:
Prior promotions for incentive compensation plan eligible employees have typically occurred in alignment with the fiscal year. Given the creation of the DCIO occurred outside of that usual cycle, staff offers two alternative options for the Committee to consider on how to handle this for any promotion within the Investment Officer classification series (CIO, DCIO, SIO, IO, AIO) as follows:
Option 1: An employee promoted within the investment officer classification series shall be eligible for a pro-rated incentive compensation plan based on the months in which they occupy each eligible classification. For example, an employee is promoted from Investment Officer to Senior Investment Officer on February 1 would be eligible to receive the 7 months worth of Investment Officer incentive compensation and 5 months of Senior Investment Officer incentive compensation for the fiscal year in which the promotion occurs.
Option 2: An employee promoted within the investment officer classification series shall be eligible for the full incentive compensation plan for the position in which they hold more than 6 months of qualifying service. For example, an employee is promoted from Investment Officer to Senior Investment Officer on February 1 would be eligible to receive the full Investment Officer incentive compensation for the fiscal year in which the promotion occurs.
As with prior resolutions on the Incentive Compensation Plan, any Investment Officer must be an employee of SBCERA at the time the award is paid, and in no case shall SBCERA be liable for any partial payment should the Investment Officer not complete the full fiscal year of employment.
BUDGET IMPACT:
Costs for this item are included in the current year non-administrative, investment budget.
STRATEGIC PLANNING GOAL/OBJECTIVE:
Quality Employer and Workplace
STAFF CONTACT:
Debby Cherney
Stacey Barnier
ATTACHMENTS:
Exhibit A: Proposed Incentive Compensation Plan effective FY 2025-26