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Jeff Tyler Oct 16, 2007

TEXT OF STORY

Scott Jagow: Paying for performance is nothing new in the world of finance. But the country’s biggest public pension fund might start paying its stock managers only if they perform well. More now from Jeff Tyler.


Jeff Tyler: CalPERS, the California Public Employees’ Retirement System, is mulling over a plan to pay fund managers only if they beat certain benchmarks. If they don’t, they get nothing. Not even their overhead costs.

University of Mississippi law professor Mercer Bullard says this model could produce higher returns, but it also presents more risk.

Mercer Bullard: The manager may find himself underwater at some point and decide that, since he’ll never get back to the point where at which he could earn his fee, he might as well just take a long shot and bet the whole caboodle on one very risky bet.

Bullard says a pension fund as sophisticated as Calpers understands how to avoid such Hail Mary incentives.

CalPERS isn’t expected to take any action immediately. But if the plan is adopted, experts say it could set the standard for other big pensions.

I’m Jeff Tyler for Marketplace.

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