Mission or Margin: Why and How Public-Sector Pension and Private-Sector Investment Firms Play by Different Rules

Long-term incentive (LTI) plans are a key tool for aligning the interests of executives with the long-term goals of their organizations. By linking compensation to sustained performance, these plans help to retain top executive talent, drive strategic leadership, and manage risk-taking over extended horizons.

In Canada, LTI plan designs for executives may vary considerably based on factors such as industry and ownership type. In this article, we contrast the differences observed in executive LTI plans at public-sector pension funds based on available disclosure, and private-sector investment firms based on anonymized insights from our client base.

Canadian pension plans are among the most sophisticated investors globally and operate a unique model that blends public accountability with active asset management. In contrast, private-sector investment firms, whether publicly traded or privately held, are more profit driven, performance-sensitive, and flexible in their approach to investment decisions, though no less sophisticated.

Philosophical Foundations

The structure of LTI plans at public-sector pension funds and private-sector investment firms reflect differences in each sector’s mission, governance, and compensation philosophy.

Public-sector pension plans are tasked with the long-term stewardship of funds to ensure stable retirement income for members through prudent risk management. Their executive compensation frameworks tend to emphasize collective fund performance, reflecting their public accountability, with less focus on individual executive contribution. While these funds compete in the same investment markets as private firms, they do not compete for capital. Member contributions provide a stable capital base that is not subject to investor withdrawals for underperformance.

Private investment firms, by contrast, operate in a competitive commercial environment where both investment performance and capital retention are at stake. Capital can move quickly in response to results, so executive incentives are often closely tied to individual or team outcomes to drive growth and outperformance. Their LTI plans typically offer more flexibility, upside opportunity, and differentiation, aligning executive compensation with business objectives and market conditions.

Public-Sector Pension Plans

Based on disclosure from organizations such as AIMCo, BCI, CDPQ, CPPIB, IMCO, OMERS, OPTrust, OTPP, PSP Investments, and UPP, Canadian pension plans predominantly use deferred cash incentives for executives that align payouts with the long-term health of the fund.

Common LTI Vehicles

The most common structure is deferred cash, where a portion of annual incentive compensation is withheld and paid out over a multi-year period. Some plans use fund-linked units that fluctuate in value based on the total return of the fund, conceptually similar to phantom equity but benchmarked to the pension’s performance rather than a share on the open market or a company valuation. Due to the corporate structure of these organizations, actual equity-based awards are typically not available.

Vesting Schedules

Vesting schedules are an important feature of executive LTI plans, primarily designed to encourage retention and long-term alignment. Most Canadian pension plans either use a graded vesting approach, typically one-third vesting per year over three years, or a three-year cliff vesting schedule (i.e. full vesting at the end of the three-year period).

Performance Metrics and Payout Determination

At public-sector pension plans, the size of the grant is generally based on a deferral of variable compensation rather than a fixed amount that then fluctuates based on explicit forward-looking performance metrics. Commonly, the value of deferred incentives is directly linked to actual fund performance after grant, causing payouts to fluctuate with the fund’s success, fostering collective accountability to the pension’s long-term sustainability.

Private-Sector Investment Firms

Private-sector investment firms, including both publicly traded asset managers and privately held firms, design executive LTI plans to have a strong emphasis on performance differentiation, flexibility, and individual accountability. To ensure that these firms remain competitive in the market, executive compensation packages must attract and retain top leadership, reward outperformance, and align interests with shareholders.

Common LTI Vehicles

Due to their corporate structures, private firms typically use a wider variety of incentive vehicles, including:

• Equity-based awards, such as Restricted Stock Units (RSUs), Performance Share Units (PSUs), and stock options, which create direct ownership or ownership-like exposure

• Phantom equity, often used in privately held firms to replicate equity upside without actual share issuance

• Carried interest, common among alternative asset managers, aligning compensation with fund or deal-level investment performance

• Performance-based cash incentives, structured with deferred payout features and adjusted based on specific financial or investment metrics

Equity-based awards are more common among publicly traded investment firms due to the availability of shares for compensation purposes.

Vesting Schedules

Vesting periods generally range from three to five years, similar to pension plans but with more variability. Some firms adopt:

• Standard cliff vesting (i.e., full vesting after three years)

• Graded vesting schedules (i.e., one-third per year over three years)

• Rolling deferrals, which extend payout over multiple years to promote ongoing retention and performance

Furthermore, clawbacks and malus provisions are more common in the private sector, which allow firms to recoup awards or reduce payouts if performance deteriorates or ethical breaches occur.

Performance Metrics and Payout Determination

Performance criteria are typically established upfront and tied to individual, team, or business unit objectives.

Common performance measures include:

• Investment performance metrics such as absolute returns or benchmark-relative returns

• Growth in assets under management (AUM) or other commercial metrics

• Financial targets like revenue, EBITDA, or profit growth for the firm or division

• Qualitative goals, including strategic initiatives, leadership assessments, or client relationship development

Incentives are earned or forfeited based on achieving these predetermined goals, with deferred payouts contingent on sustained performance. This structure allows for greater differentiation based on performance and alignment with individual contributions.

Conclusion

While executive LTI plans are a valuable tool for both public and private investment organizations, the design choices reflect differences in organizational structure, available capital, and compensation philosophy.

Public-sector pension plans prioritize alignment with total fund performance, risk-sharing, and transparency. Private-sector firms emphasize performance-driven rewards, customization, and competitive differentiation.

In our experience advising clients across both sectors, we observe a growing convergence in design principles, as both sectors compete for talent with similar skillsets. To remain competitive with the private sector, public-sector pension plans may have to provide increased quantum or offer incentive plans that mirror what the individual could have received in the private sector.

Nevertheless, the mechanisms for each LTI plan remain distinct, requiring tailored approaches that reflect each organization’s mission, culture, and strategic priorities.

If you’d like more information or assistance with designing an effective LTI plan for your organization, please contact CGP.