Articlehybrid2021

Outraged by Compensation: Implications for Public Pension Performance

32 citations0/0 files storedReview of Financial Studies

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Financial Literacy, Pension, Retirement Analysis Corporate Finance and Governance State Capitalism and Financial Governance

Abstract

Abstract Public pension boards fear inciting stakeholder outrage if they compensate internal investment managers with market-level salaries. We derive theoretical implications in an agency-portfolio-choice model motivated by inequality aversion. In a global sample, relaxing the effect of outrage on contracting leads to an average annual incremental value-added of $49 million generated through 11 bps in higher excess returns from risky assets, at the cost of $302,429 in additional compensation. Governance reforms that address outrage by reducing political appointees or requiring independent skills-based boards can increase the annual value-added. These findings are orthogonal to costly political distortions from underfunding and pay-to-play schemes. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

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References

1999A Theory of Fairness, Competition, and Cooperation 2000ERC: A Theory of Equity, Reciprocity, and Competition 2006The Effects of Cognitive and Noncognitive Abilities on Labor Market Outcomes and Social Behavior 2004Inequality Aversion, Efficiency, and Maximin Preferences in Simple Distribution Experiments 1989Social utility and decision making in interpersonal contexts.2015Measuring skill in the mutual fund industry 2014Scale and skill in active management 2008Theories of Fairness and Reciprocity: Evidence and Economic Applications

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