Amended bill related to RIO incentive compensation program gets do-pass recommendation

Yahoo

31-03-2025

Mar. 31—BISMARCK — A bill related to an incentive compensation program for the North Dakota Retirement and Investment Office got a do-pass recommendation on a 14-2 vote from the Senate Appropriations Committee on Friday, March 28, after it was amended to have the agency report to the appropriations committees during the next legislative session regarding its plan to internally manage 50% of the investments under control of the State Investment Board.
Sens. Cole Conley, R-Jamestown, and Sean Cleary, R-Bismarck, were opposed.
Before the Senate Appropriations Committee hearing on Friday, its Human Resources Division failed to include an amendment to House Bill 1022 on a 2-3 vote that would have removed Retirement and Investment Office fiscal operations positions from being eligible for the incentive compensation program. The amendment also included a 75% cap on the bonus for the Retirement and Investment Office's incentive compensation program for each eligible full-time-equivalent investment position.
The motion also included adding an amendment that would require the North Dakota Retirement and Investment Office to report to the appropriations committees during the legislative session in 2027 about its plan to internally manage investments.
Cleary and Sen. Jeffery Magrum, R-Hazelton, voted to approve the amendments.
Later during the hearing on HB 1022, the Senate Appropriations-Human Resources Division approved on a 4-1 vote adding the amendment that would require the North Dakota Retirement and Investment Office to report to the appropriations committees during the legislative session in 2027 about its plan to internally manage investments. Magrum was opposed.
The Senate Appropriations-Human Resources Division also gave a do-pass recommendation on HB 1022 on a 3-2 vote, with the amendment requiring RIO staff to report to the Legislature in 2027. Cleary and Magrum were opposed.
The incentive compensation program could allow the top two RIO officials to earn up to 100% of their salaries as incentive compensation, although officials in the office said that might not happen every year. RIO is responsible for coordinating the activities of the State Investment Board and the Teachers' Fund for Retirement, according to RIO's website. The State Investment Board has statutory responsibility for the investment program of several funds, including the Legacy Fund.
The annual salaries for the RIO executive director and chief investment officer are $237,400 and $312,000, respectively.
The documents of the incentive compensation program say it is designed to help attract and retain talented investment professionals. The program is also designed to help RIO earn the highest possible investment returns at a reasonable cost and at controlled levels of risk and to reward long-term investment performance.
During the 2023 legislative session, the state Legislature authorized RIO to develop an incentive compensation program for its investment and fiscal operations positions necessary for the management of funds under the control of the State Investment Board.
North Dakota Century Code Chapter 54-52.5-04 says that RIO may develop an incentive compensation program for full-time-equivalent investment and fiscal operations positions necessary for the management of the investment of funds under the control of the State Investment Board. The State Investment Board must approve annually the provisions of the program.
Cleary said one of his amendments to HB 1022 would remove "fiscal operations" from North Dakota Century Code Chapter 54-52.5.04. He said the incentive compensation program is an investment performance program for employees making the investments.
"I don't know if the plan is to have the executive director as part of this," he said. "It looks like the plan they proposed in the interim is, but that also seems odd to me."
Cleary told The Jamestown Sun that fiscal positions aren't directly involved in making the investment decisions. He said it's odd for fiscal positions to be eligible for the incentive compensation program that's designed to provide a bonus based on investment performance.
"I think common sense here dictates that the bonus for investment performance should be given to folks making the investments," he said. "Whether it's executive director or fiscal staff ... I don't think the labor market is different on how we need to compensate compared to someone who's an investment analyst — there's a lot of different pressures there — from how they're being compensated in the private sector and in other public sector agencies. But, the fiscal staff and the director, those are positions that to me it just doesn't make as much sense to have them be part of this investment bonus structure, and I don't think anyone really had that in mind when we passed it two years ago."
Another amendment by Cleary — which was not approved to be added to HB 1022 — included capping the maximum incentives at 75% of an investment position's salary for the incentive compensation program.
"There is a bill in the House to get rid of this program entirely," Cleary said at the Senate Appropriations-Human Resources Division hearing. "I think I said when I introduced this amendment, that seems short-sighted. We are asking them to do more; they need to pay competitively to do that. Part of that is the bonus structure.
"I don't want to speak for the subcommittee or the Senate, but I don't know if folks understood that that meant that there's going to be bonuses up to 100% of the salary," he said. "So when you see that, it seems like it could be a lot, and that's where the 75% of the cap came from."
Cleary told The Jamestown Sun that the 75% cap for a bonus through the incentive compensation program was a guide rail into how high the maximum bonuses should go.
"I think the way I landed on that number is it seems like a 100% bonus just seems pretty excessive in public-sector employment and so I thought 75%, that's still a pretty generous bonus on top of their base salary," he said.
Cleary said he reviewed some testimony from the 2023 legislative session about RIO investment staff.
"That's just now how it (incentive compensation program) was implemented during the interim (session)," he said.
Sen. Kyle Davison, R-Fargo, said at the Senate Appropriations-Human Resources Division that he reviewed what he was involved in last session and what the Legislature's commitment was in looking at a new system to manage state investments.
"It's what I committed to last session from a system change ... that I believe is the right system, and then when I look at the 75% of the base and the pay on the amendment, that wasn't what I agreed to previously," he said, referring to RIO's budget. "I think the State Investment Board has done their due diligence. I think RIO has done their due diligence on what this pay should be. I think we should let the process evolve over a session over the next couple of years before we meet again and monitor it."
Jodi Smith, RIO interim executive director, told the Senate Appropriations Committee that Verus Advisory Inc. sets the benchmark for the incentive compensation program before the fiscal year begins.
"If we are one basis point above, that's where you get the minimum compensation," she said. "If we are 25 basis above, that's where you get that middle ground. Then we would have to get to 50 basis points before you got that maximum."
She said using the current benchmark and $23 billion in assets, RIO would need to bring a benefit of more than $19 million above the benchmark before the minimum bonus for the program is instituted.
"That incentive payout then by gaining $20 million to the state is $205,000 so to me that's a pretty nominal number when we are gaining the state that $20 million," Smith said. "In order to gain up to that maximum amount, which is what the policy is written at today, we'd have to earn the state $132 million above that benchmark. That payout then is looking at about $2 million based off of our current pay scale of our employees."
She said anyone eligible for an incentive bonus is not eligible for a performance bonus.
Smith also said RIO determined it wanted the authority to design and implement an incentive compensation program during the last legislative session, "which is kind of stepping outside what most other agencies are able to do."
"Then they wanted the time for the board to write a policy," she said.
Conley told The Jamestown Sun that he is opposed to the top two people in RIO potentially receiving 100% of their salary as a bonus.
"Those same two people were the ones that could set the threshold, and they set it at a half a percent," he said. "I think the people that have the most to gain shouldn't be the ones setting the threshold on how they get paid."
He added that RIO has hired an independent consultant to set the benchmarks, which "is probably a good thing."
Smith wasn't the executive director when the incentive compensation program was approved. Jan Murth, former RIO executive director, resigned from her position, effective Jan. 3.
The incentive compensation program provides incentive compensation as a percentage of regular compensation, with 80% of the incentive compensation based on the financial performance of the investments and 20% based on individual goals, according to the Retirement and Investment Office's budget No. 190 for SB 2022.
If the three-year rolling average return of the investments exceeds the benchmark return by 0.5%, 100% of the incentive compensation based on financial performance is available to the employees, the document says.
The maximum incentives as a percentage of regular compensation are as follows:
* 100% for the chief investment officer and executive director
* 90% for the deputy chief investment officer
* 75% for the chief risk officer, senior investment officers and portfolio managers
* 60% for the chief financial officer
* 50% for investment officers, risk officers and accounting managers
* 25% for senior investment accountants and investment accountants
Plan participation is determined based on employment status and the executive director's assessment of the position's impact on the Retirement and Investment Office's overall investment performance.