Calpers may stiff underperforming money managers

Here's a novel idea: Pay someone only if they are providing better performance than no one -- not anyone, no one -- could provide.

Well according (subscription required) to The Wall Street Journal, the California Public Employees Retirement System (Calpers) is contemplating doing just that with the money managers it hires: "Calpers' investment staff plans to present to the board a system in which the pension fund's global stock managers would receive a fee only if they outperformed certain benchmark indexes. Managers whose returns failed to beat the index would be paid nothing for that period."

This makes perfect logical sense. Why pay a management fee to someone who's doing worse than an index fund? But the possible risk is that paying strictly for performance would induce managers to take bigger risks -- possibly increasing the incidence of blow-ups and rogue traders.

But these kinks could probably be worked out with careful monitoring of risk, and tailoring the bonuses to the level of risk a manager assumed. But it's time for money managers to be paid for performance. Too often, it seems they are paid just for having a pulse.