A Performance Audit
An Audit Report on Incentive Compensation at the Permanent School Fund, General Land Office, Employees Retirement System, and Teacher Retirement System
June 2016
Summary Analysis
The Permanent School Fund (PSF) of the Texas Education Agency and the General Land Office (GLO) calculated and paid incentive compensation awards in accordance with their policies and procedures for plan year 2015. GLO should strengthen controls over its incentive compensation plan by formally approving that plan prior to the start of the plan performance period. GLO also should retain documentation of management's review of plan calculations in accordance with its policies and procedures.
The Employees Retirement System (ERS) generally awarded and paid incentive compensation in accordance with its policies and procedures for plan year 2015. However, ERS overpaid an employee $176.77 because it did not calculate that employee's award in accordance with its policies and procedures. Additionally, ERS should strengthen controls over its incentive compensation calculation and review process by developing formal calculation and review procedures. The ERS executive director, who was appointed on June 1, 2015, did not receive any incentive compensation for the 2015 performance period.
The Teacher Retirement System (TRS) generally awarded and paid incentive compensation in accordance with its policies and procedures for plan year 2015. However, TRS overpaid a total of $2,236.00 to 9 employees because it input incorrect information into its calculation. TRS should strengthen controls over its incentive compensation calculation and review processes to prevent and detect errors and ensure that it records all incentive compensation payments correctly in its general ledger.
The Permanent School Fund (PSF) of the Texas Education Agency calculated and paid incentive compensation for its plan year ended August 31, 2015, in accordance with its policies and procedures. The commissioner of education formally approved the PSF incentive compensation plan before the beginning of the plan performance start date.
The PSF awarded a total of $1,639,513 in incentive compensation to 47 employees. The PSF awarded the most incentive compensation to its chief investment officer, who was awarded $143,551 payable during a three-year period. That $143,551 represented 9 percent of the $1,639,513 in total incentive compensation that the PSF awarded.
The General Land Office (GLO) calculated and paid incentive compensation for its plan year ended June 30, 2015, in accordance with its policies and procedures. However:
• The land commissioner and the chief clerk did not formally approve the incentive compensation plan until July 9, 2014, which was after the performance period began. Obtaining formal approval of the incentive compensation plan prior to the beginning of the performance period could help ensure that the plan aligns with the intent of executive management.
• GLO did not retain documentation of one manager’s review and approval of the incentive award calculation spreadsheet in accordance with its policies and procedures. Management review provides additional assurance that the incentive awards are calculated and paid in accordance with plan policies and procedures.
GLO awarded a total of $299,655 in incentive compensation to 5 employees. GLO awarded the most incentive compensation to its chief investment officer, who was awarded $211,815 payable during a two-year period. That $211,815 represented 71 percent of the $299,655 in total incentive compensation that GLO awarded.
The Employees Retirement System (ERS) generally calculated and paid incentive compensation for its plan year ended August 31, 2015, in accordance with its policies and procedures. However:
• ERS incorrectly calculated the proration for one employee, which resulted in an overpayment of $176.77. For incentive calculations, ERS employee promotions are prorated effective as of the date of the promotion. The overpayment occurred because ERS used the wrong promotion date for the proration calculation, and subsequent reviews did not identify the error.
• ERS does not have written policies and procedures regarding the incentive compensation calculation and review process. That increases the risk of inaccurate award payouts due to mistakes in the calculation and review process.
ERS awarded a total of $4,764,067 in incentive compensation to 63 employees. ERS awarded the most incentive compensation to its chief investment officer, who was awarded $382,777 payable over a three-year period. That $382,777 represented 8 percent of the $4,764,067 in total incentive compensation that ERS awarded. The ERS executive director, who was appointed on June 1, 2015, did not receive any incentive compensation for the 2015 performance period.
The Teacher Retirement System (TRS) generally calculated and paid incentive compensation for its plan year ended September 30, 2015, in accordance with its policies and procedures. However, TRS overpaid a total of $2,236 to 9 employees because it input incorrect information into its calculation. Specifically, to calculate the performance of one portfolio, TRS used a performance target that differed from the performance target documented in its incentive compensation plan. That overstated the performance of the employees assigned to that portfolio and resulted in the overpayments. TRS did not detect the error during its reviews.
TRS awarded a total of $8,607,892 in incentive compensation to 138 employees. TRS awarded the most incentive compensation to its chief investment officer, who was awarded $329,708 payable over a 2-year period. That $329,708 represented 4 percent of the $8,607,892 in total incentive compensation that TRS awarded.
TRS changed one incentive compensation award amount for plan year 2014. (TRS made that change after the State Auditor’s Office had audited incentive compensation for plan year 2014.). That change resulted in TRS paying an additional $22,453 to one employee, and TRS incorrectly recorded $5,613 of that amount as a one-time merit payment (rather than incentive compensation) in its general ledger. TRS paid the additional compensation to an employee who retired during the 2015 plan performance period.
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