Asbury to Recommend Payment of 2002–2003 Performance Awards

The following is a news release that was shared with the media and many key stakeholders of STRS Ohio yesterday.

May 11, 2004

Asbury to Recommend Payment of  2002–2003 Performance Awards For Eligible STRS Ohio Associates
Executive Director Dr. Damon Asbury plans to recommend that the Performance-Based Incentive (PBI) Awards earned by eligible associates for the 2002–2003 fiscal year be paid, along with payment of the Investment Associate Recognition and Retention Program, at the Retirement Board Staff Benefits Committee meeting on May 20. The Retirement Board suspended the payment for work accomplished under these programs in June 2003.

“I appreciate and understand that some of our membership may not believe that we should pay these performance awards,” Asbury said. “However, the associates who participated in the programs and accomplished the stretch goals contained in their written plans did so with the understanding they would receive additional compensation. After reviewing an analysis of the issue prepared by the Attorney General’s office, I concluded that the system has a legal obligation to pay these awards. Further, I believe this system faces a substantial risk of even greater liability — consisting of both interest and punitive damages — if we don’t honor these awards. The final outcome could far exceed the total payment amount I am recommending to the board. With this payment, we can put this issue behind us, close this chapter and move forward.”

Asbury will recommend that compensation earned under three programs be paid to eligible STRS Ohio associates. These are:

• PBI awards for eligible Investment associates covering performance from Jan. 1, 2003–June 30, 2003. (This time period reflects the change in measuring fund performance to a fiscal-year basis from a calendar-year basis. Awards for Jan. 1, 2002–Dec. 31, 2002, performance were paid in March 2003.) This amount totals approximately $1.1 million for 102 associates.
• PBI awards for eligible non-Investment associates covering performance from July 1, 2002–June 30, 2003. This amount totals approximately $1.8 million for 269 associates. (This program has been discontinued going forward.)
• Approximately $950,000 for the Investment Associate Recognition and Retention Program for 68 eligible Investment associates that represents deferred payouts. (These were scheduled to be paid in July 2003.) The total for the three programs, which involve 371 associates, is $3.85 million. The PBI awards — Investment and non-Investment — average 77% of maximum eligibility.

The money for the May 2004 payments is included in the current operating budget, which covers July 1, 2003–June 30, 2004. The operating budget for the next fiscal year, which the Retirement Board will act on at its May 21 meeting, includes projected incentive payment compensation for only Investment associates.

The PBI program for non-Investment associates had been evaluated by independent firms who confirmed the appropriateness of the structure and application of the program. However, it was also noted that a PBI program for non-Investment staff was not a common practice among public pension plans.

“This compensation program for non-Investment associates has not been well received by our members. Consequently, we did not continue the program with the start of the 2003–2004 fiscal year. This payment is the final step we need to take to close out the program,” Asbury noted.

At the request of the Retirement Board, the PBI program for Investment associates was redesigned last fall and adopted by the board and shared with STRS Ohio membership in October 2003. Under the new program, 20% of each eligible associate’s incentive award is now dependent on the total fund attaining a positive absolute return.

Total fund performance during the 2002–2003 fiscal year, which includes the six months covered in this May PBI payment for Investment associates, was 2.32%. Net investment income was $915 million. By beating the total fund benchmark of 2.07%, STRS Ohio Investment associates added over $100 million in value for the fiscal year.

The Investment Associate Recognition and Retention Program began in 1998. This program was funded in a year when: (1) the actuarial rate of return exceeds 8%, and (2) the relative performance of STRS Ohio’s total fund exceeds the composite benchmark by 11 basis points (11/100th of 1%). Given that this program requires an actuarial rate of return exceeding 8%, the program has not been funded for the past two fiscal years.

In the revised budget for fiscal year 2003–2004 that the Retirement Board adopted in August 2003, funds remaining in the Recognition and Retention Award Program were reduced by $1.2 million, leaving approximately $950,000 in the fund. This payment of the $950,000 reflects the final payout and effectively discontinues the program.

“Our members have said how important it is for this system to demonstrate integrity. I believe that fulfilling this legal obligation to these associates is a demonstration of that,” said Asbury. “When I was named executive director, I promised that our stakeholders would not only be kept informed of our decisions, but also know the ‘why’ behind those decisions. That’s why it is important for me to present this at a public board meeting and for our members to understand the action I am recommending to the Retirement Board.

“We will now look to the independent fiduciary performance audit that will be conducted under the direction of the Ohio Retirement Study Council to focus on all elements of our total associate compensation package. This will help us determine where we need to be in comparison to the market to recruit and retain individuals who can provide the level of services our members need and deserve.”

Return to the list of STRS Ohio news e-mails sent in 2004.