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Outraged by Compensation: Implications for Public Pension Performance

Author

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  • Alexander Dyck
  • Paulo Manoel
  • Adair Morse

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.

Suggested Citation

  • Alexander Dyck & Paulo Manoel & Adair Morse, 2022. "Outraged by Compensation: Implications for Public Pension Performance," The Review of Financial Studies, Society for Financial Studies, vol. 35(6), pages 2928-2980.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:6:p:2928-2980.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhab109
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    References listed on IDEAS

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    Cited by:

    1. Daniel Garrett & Ivan T. Ivanov, 2023. "Gas Guns and Governments: Financial Costs of Anti-ESG Policies," Working Paper Series WP 2023-07, Federal Reserve Bank of Chicago.
    2. Aleksandar Andonov, 2024. "Delegated Investment Management in Alternative Assets," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 13(1), pages 264-301.

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    More about this item

    Keywords

    G11; G23; G3;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G3 - Financial Economics - - Corporate Finance and Governance

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