Review of Financial Studies Vol. 35 No. 6 2022

Outraged by Compensation: Implications for Public Pension Performance

Alexander Dyck¹; Paulo Manoel²; Adair Morse³

¹ Rotman School of Management, University of Toronto · ² Gatton College of Business and Economics, University of Kentucky. · ³ University of California, Berkeley and U.S. Department of the Treasury

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.

DOI

10.1093/rfs/hhab109

Volume

35

Issue

6

Pages

2928-2980

Language

en

Sources

openalex bibtex:phds-export.bib crossref

Cite

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