A Conversation with CalSTRS CIO Christopher Ailman – Part 3

PLANSPONSOR.com: Why are so many of your peers heading toward the private sector?

AILMAN : In many cases, it?s all about pay. If you look, most of them haven?t gone to the dot coms; they?ve gone either to marketing or to money management firms. In the case of Sheryl Pressler or Patrick Mitchell, both left to run their own investment management organization where they have total control and more flexibility on issues like their overall budget and pay. With the markets being this good, there are a lot of people who want to go out on top, and I don?t blame them. They see the incredibly attractive salaries elsewhere, and the opportunity to build equity personally. It?s not going to slow down until there?s more volatility in the economy so the opportunity doesn?t look as good.

Also, public funds are constrained being in the environment they?re in. The bottom line, we?re all multi-billion dollar investment management organizations. But we operate inside of a governmental framework that?s kind of a flawed business model. So you?re going to have problems within that business model, and it constantly shows up in the fact you can?t retain quality people for very long. That model is not going to get changed overnight.

You?ve seen money management firms created inside of banks and pretty soon they realize they have to move independent because they can?t pay the money managers the same salary as a regional bank vice president. You?ve seen the endowments move independent so they?re not part of the university system. Some corporations have turned their pension management into a revenue source by making them independent companies. I don?t know if public pension plans will ever go there.

PLANSPONSOR.com : How much can you improve your pay if you move to the private sector?

AILMAN : There aren?t that many big corporate plans, but at the top twenty I think each of the CIOs makes about double what I?ll make at California; double to quadruple what I?ll make here at Washington. With the move into money management, salaries get closer to $1 million a year. But with that comes risk and opportunity. You?ve got volatility, you?ve got equity ownership, you?re running your own show. Wall Street tends to expand at the top and contract at the bottom. It?s normal in an expansion mode to see people getting hired away left and right.

PLANSPONSOR.com : I guess that answers why private sector CIOs never seem to come over to the public side.

AILMAN: I have to laugh at that. Why should they? More work for less pay. CalSTRS? Board and I had a lot of discussions, because they want to retain a CIO for a period of time and that?s always a threat. But there aren?t that many big corporate pension funds, and a mid-sized corporation isn?t going to pay that kind of money.

You may at some point see some corporate CIOs come to public funds as mergers continue on. That?s the one big risk; if the company merges, you?ve got two pension staffs, and only one is going to survive.

ON TAP TOMORROW – The special challenges of social investing and private equity.