CalPERS CEO Marcie Frost and its board are about to poke a stick in the eyes of California municipalities and other government bodies that are having to cut other spending in order to pay rising pension bills.1 At an upcoming board meeting next week, Marcie Frost, through the convenient mouthpiece of a compensation consultant, is asking the board to adopt principles and make further recommendations on pay design that are guaranteed to fatten her wallet.
If CalPERS wants to give right-wing pension haters an easy headline, this is just the way to do it.
How does the short presentation written in soporific expert-speak make clear that the pay increase fix for Frost is in? Because the consultant, Grant Thornton, has chosen a comparative group against which to score Frost’s pay. Per the documents embedded at the end of this post, They’ve already found that she’s at the 25th percentile based on some measures.
Notice that the compensation consultant reached this general conclusion in 2015. The former CEO, Anne Stausboll, announced her retirement in January 2016, effective as of the end of June. The time to have reset CEO salary and rewards was then, in context of a search. To do so now, with a CEO in place is featherbedding and as we’ll discuss below, a violation of fiduciary duty by wasting trust assets.2
Put it another way: if the board really believes its rationalization for handing Frost more money, that “the CEO position” deserves more pay because that’s what it takes to hire someone sufficiently qualified, they are effectively saying she is not fit for the role. That means they should approve the new pay package, fire Frost, and hire someone who has the education, credentials, and experience needed.
Mind you, this recommendation to develop a new pay scheme for Frost comes after she already set up a back door increase, in terms of having her maximum bonus elevated last year by 18%. CalPERS’ board astonishingly has been giving Frost outstanding ratings and so increasing attainable bonus was a stealthy device for virtually assuring her of higher comp plenty soon. Seeking even more in the way of pay increases is unseemly given CalPERS’ underfunding.
On top of that, CalPERS is also likely to raise Frost’s pay via another mechanism, by making it all salary.
In March 2018, the Committee directed CalPERS team members to bring back an action item with options for a fixed compensation model (salary only) for the CEO position, in addition to other compensation plan options for consideration.
Notice also that if you read this month’s materials (the document embedded at the end of this page plus this agenda item summary and a supporting short set of slides), there is no detail on pay proposals. We’ve discussed before how this process works at CalPERS as a way to get the board to commit to decisions blindly. The board is asked first to adopt a policy with is usually put in such apple-pie-and-motherhood terms that it is hard for the board to turn it down. Then when the specifics are presented down the road, they are framed as the logical and therefore inevitable outcome of the earlier policy decision, even though the policies are often so broad that they allow for a lot of room in terms of implementation.
First we’ll discuss why executive compensation consultants are in the business of recommending heftier pay packages. Then we’ll discuss in more detail why increasing Frost’s pay and making it all salary is indefensible.
The Executive Compensation Consultant Racket and How It Guarantees Ever Rising Pay
We’ve written repeatedly, virtually from the inception of this website, how the executive pay racket works. Despite the pretense that the consultant advises the board, in a corporate setting, almost without exception, they are screened by the HR Department, who reports to the CEO. The consultant knows full well whose interests they need to serve if they are to be welcome in C-suites.3
The executive comp consultant scheme is arguably the largest single driver of why CEO pay becomes a bigger and bigger multiple of ordinary worker earnings. The compensation hired hand, as it has with CalPERS, defines a universe of supposedly comparable companies and then scores their pay.4 They persuade their clients that they should target at least being at the 50th percentile. Many opt to be at the 66th or 75th percentile.
This process guarantees permanent employment for compensation consultants and ever-more-lucrative pay for the executives that are their real clients. It also assures that companies that wind up with top employees that wind up in the bottom half (or below even higher target levels) will increase their compensation enough to get them in the cool kids club. That moves other companies into the “pay losers” bucket, who then via their existing scorecards or special ministrations of the compensation gurus, will then move their pay levels up.
Why Increasing Marcie Frost’s Pay Level and Making It All Salary Is Not Justified
Even though the odds greatly favor the deeply captured CalPERS board throwing yet more money bouquets at Frost, this change can’t be defended.
Frost’s pay level is obviously competitive for her qualifications, as evidenced by the fact that she’s in the job. The logic of the compensation consultant’s analysis is “You need to pay what the market demands”. We already know what the market price for Marcie Frost is. She hit CalPERS bid.
Another way to think of it is that Frost is indeed properly paid even if she is at the 25th percentile. She is only a high school graduate. She makes it clear far too often that she is in over her head at CalPERS.
Consider two fresh examples: It was utterly reckless, amateurish, and evidence of deeply misguided priorities for her to have gotten on the phone, even worse, on the record, with reporter Mike Hiltzik to defend Chief Financial Officer Charles Asubonten’s resume fabrications. And she managed to make this utterly bone-headed move even worse by making the call jointly with Asubonten. That means she was making herself responsible for what he said. She clearly had not made any effort to check the allegations, otherwise she never would have stuck her neck out.
From a governance standpoint, it was completely inappropriate to make any comment until the matter had been investigated. Her speaking to Hilzik further suggests she did not intend to take that step, despite the fact that it was obviously necessary to protect the organization.
Frost appears so naive as to think she and Ausbonten could talk Hiltzik out of writing his piece, or get him to write a tepid article despite the extent and the solidity of the evidence against Asubonten. In other words, Frost’s ego and her personal attachment to Asubonen were more important than doing what was right for CalPERS.
And as we discussed yesterday, Frost has yet again given Asutonen the CalPERS’ seal of approval by scheduling him to run virtually all of next week’s Finance and Administration Committee. That means either CalPERS has made a sham investigation and has decided to keep him on despite him having unquestionably having told multiple, verifiable, material lies on his resume, or for some perverse reason, the investigation has been dragged out, presumably because Frost hopes l’affaire Asubonten will blow over.
In other words, the justification for the “business as usual” stance is that as long as the investigation is open, Asubonten should be allowed to carry on. But no staff member has a right to speak to the board. Having him appear in the absence of CalPERS being able to say he’d cleared him of press allegations looks like Frost is in deep denial as to how badly her handling of this incident reflects on her.
The second example came up in passing in our post on the voting by phone shenanigans in the 2017 CalPERS board elections. Frost made a series of lame misdirections to cover up for what her own e-mail presented as the destruction of evidence by a CalPERS vendor that was subject to a litigation hold. And the obviously bogus excuses were for Frost to try to evade her duty to provide a board member with a document she’d requested. Even worse, Frost apparently parroted a transparently false technology story. As many readers said, the fact that she didn’t recognize how passing that on would discredit her also suggests she is not competent to oversee an operation where IT is a significant component of its activities and risks.
Raising Frost’s pay is tantamount to a gift to her and thus a violation of fiduciary duty. As we indicate yesterday, Anne Stausboll, who clearly had a better track record as CEO of CalPERS than Frost has had so far, and was also much better skilled and credentialed (she had been Chief Operating Investment Officer and had a law degree) was unable to land a job after leaving CalPERS. The board is not attempting to justify this prospective pay increase as warranted by Frost’s performance. Nor is there any reason whatsoever to think that someone might bid Frost away. That means that paying her more would be an unjustified gift and a waste of beneficiary funds, which is a violation of fiduciary duty.
Making Frost’s pay all salary contradicts of the principles it uses to pay senior staff, and separately amounts to another de facto pay increase. Why should the CEO be exempt from the idea that people should be paid for performance? Frost has allegedly offered the rationale that it somehow creates a conflict of interest with her staff in reviewing them. No public company takes this point of view, and as a manager of beneficiary assets, performance does matter at CalPERS.
And do not forget that making Frost’s cash rewards all salary, unless the overall pay level were reduced, which does not appear to be in the cards, is in and of itself a pay increase. The current CalPERS board is so wedded to the idea of paying its top executives performance bonuses whether or not warranted by setting absurdly lax targets and even then paying them when they are not met that they appear to have forgotten that a salary is an assured payment and a bonus is not. But if beneficiaries keep electing less captured board members, that too can change.
Paying Frost all in salary undermines CalPERS’ credibility as an advocate for better corporate governance. It is hard to take an institution that doesn’t embrace paying only for performance seriously when it complains about CEOs being paid out of line with the results they deliver.
Increasing pay at the top level of CalPERS when some California government bodies are under serious budget strain thanks to higher required contributions is guaranteed to create more hostility and bad press. Frost and the CalPERS board needs to get out of their Sacramento bubble. As a result of its underfunding, CalPERS no longer gets the benefit of the doubt from the press or California taxpayers. Having the CalPERS board give Frost and some other top staffers and departments more compensation runs the very real risk of this being taken up as proof of how CalPERS is perfectly content to see government budgets burn as long as its own are taken care of.
As we indicate above, if CalPERS needs to pay more when filling specific open positions, that’s a more gradual and defensible way of increasing compensation levels over time. It could also conceivably use that to justify targeted pay increases for particular units.5 That could in turn make it desirable to give staff more latitude to offer more pay for roles now deemed to be underpaid, and perhaps allow some adjustment to pay levels for people at the same pay grade in the same group when that occurs. But this “Gimmie because we think it’s overdue” approach is tone deaf and has real potential to do harm.
1 In case you are new to this site, we are strong supporters of workers having strong retirement protection. It would be vastly better to have retirement incomes funded at the Federal level. The fix most public pensions in America are in is almost entirely the result of self-inflicated wounds, the biggest being overly optimistic return assumptions, or even (as in the case of New Jersey starting with Governor Christie Todd Whitman) deliberate decisions leading to underfunding, with the result that many public pension funds are somewhat to deeply underfunded. There are pension systems in the US that are in fine financial shape, as are most in Canada, where the public pensions used much lower return assumptions than their typical US counterparts.
Given CalPERS’ underfunding (even with market valuations at nosebleed levels, it was only 71% funded at the end of last year), it is politically tone deaf to contemplating a salary increase.
2 Multiple people close to CalPERS contacted us to voice opposition Frost’s prospective pay raise, including employees, one of whom described her as “exceptionally incompetent.” Note that anyone senior enough to interact directly with Frost would have an incentive to back her getting higher pay, since it would be consistent with bringing many other “deemed to be not high enough” compensation packages up. And for the record, Margaret Brown was not one of them.
3 The pretense that the comp consultant really works for the board is even thinner at CalPERS than at most organizations. Even though the executive compensation consultant is indeed one of the advisors in theory hired by the board, even the policy language says they merely “reserves the authority to approve the procurement of services.” With the fiduciary counsel, the staff reviews and scores the candidates, gives them a recommendation, but at least allows the board to interview them, which historically has been done in public session. Any counsel is arguably a more sensitive assignment than a compensation consultant. Former board member JJ Jelincic says during his eight-year tenure on the board, he cannot recall the board ever screening a compensation consultant in public session.
4 It is quite clear that some of the companies in the comparative universe don’t belong there, most importantly, the heads of major corporate defined benefit plans. It is hard to imagine that any of them would be interested in going to a public pension fund because pretty much all of them are political cesspools. The only exception might be someone who had a genuine interest in public service and/or making a transition to getting into politics, and would accept the proposition that a public sector job would be less well remunerated.
5 Unless CalPERS is able to create a new job classification, it may be have binding limits on how much it could pay a new hire relative to what people at the same skill level in the same unit are making; under California Government Code Section 20098, CalPERS has latitude over the pay for certain specified positions like Chief Actuary and its General Counsel as well as others defined as “managerial”; presumably, justifying what to pay for these roles is why the various comp consultants ares advising CalPERS in the first place. Having said that, on the one hand, it’s common to have pay bands for various job grades; on the other hand, it arguably be divisive and demotivating for new hires to be paid well over what people who are doing pretty much the same work are earning.item05-02_a