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An Audit Report on Incentive Compensation at the Teacher Retirement System, the Permanent School Fund, and the Employees Retirement System

April 2013

Report Number 13-033

Overall Conclusion

Through their incentive compensation plans for plan year 2012, the Teacher Retirement System (TRS) and the Permanent School Fund (PSF) of the Texas Education Agency made incentive compensation awards to employees in accordance with their policies and procedures. However, both TRS and the PSF could strengthen their incentive compensation plan oversight by formally requiring annual approval or confirmation of those plans. Although the TRS board of trustees confirms the continuation of the TRS incentive compensation plan each year, the approved incentive compensation plan does not require that confirmation. Similarly, although the commissioner of education approved the PSF incentive compensation plan, the commissioner was not required to do so.

The Employees Retirement System (ERS) did not always award incentive compensation in accordance with its policies and procedures. Auditors identified the following:

- ERS did not finalize its written incentive compensation plan until April 2012, which was seven months after the beginning of its plan year. On August 23, 2011, the board of trustees approved certain changes to the incentive compensation plan (see Appendix 2 for an excerpt from the board of trustees meeting minutes). However, ERS subsequently made additional changes and did not present those changes to the board of trustees. Those changes redefined how the amounts of incentive compensation would be calculated for the individuals in those positions for plan year 2012. Those changes modified the incentive compensation calculation metrics for 60 percent of the individuals eligible for incentive compensation.

- The ERS executive director was eligible to receive incentive compensation through the ERS incentive compensation plan. However, the ERS executive director received a one-time 50 percent merit increase of $162,501 from the ERS board of trustees "…in consideration of the Executive Director's management and oversight of ERS, its five retirement programs, and accomplishments in 2012 in the areas of strategy and leadership…the interim benefits study, and her skills as a member of the internal investment committee…" ERS paid the executive director that merit increase in November 2012. See Appendix 3 for an excerpt from the board of trustees meeting minutes.

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