May 15 (Bloomberg) -- Calpers, the huge pension fund for retired California public employees, says all the right things about corporate governance.

It even publishes an annual list of companies it faults for poor performance and excessive executive pay.

Behind those lofty pronouncements, you find an institution that seems intent on indiscriminately owning a little bit of everything, regardless of returns and whether the chief executive officer adheres to pay-for-performance principles.

I recently completed a pay study covering 504 U.S. companies with market capitalization of $3 billion or more. It turned up 18 low-performing, high-paying companies, and 29 high-performing, low-paying companies.

The California Public Employees Retirement System, or Calpers for short, owns stock in all but one of the low- performance, high-pay group. As of the close on May 8, these holdings were valued at $1.3 billion.

Calpers also owns stock in all of the high-performance, low- pay companies, holdings valued at about $1.9 billion.

Let's take a closer look at the two groups. The underperforming-overpaying companies lagged the Standard & Poor's 500 Index by at least 15 percentage points in fiscal 2007, while their CEOs received total pay that was higher than a competitive rate by 50 percent or more. That rate took into account both the company's size and the CEO's appetite for pay risk, as measured by the proportion of stock options in the total pay package.

Inverse Relationship

The overperforming-underpaying companies beat the S&P 500 Index by at least 15 percentage points and paid CEOs at least 50 percent below a competitive rate.

A look at the groups' total returns for fiscal 2007 underscores the inverse relationship with pay.

For the low-performance, high-pay companies, median total return was negative 14 percent. That was 21 percentage points less than the comparable S&P 500 return. Median pay for their CEOS was $21 million, a level 103 percent above a competitive pay level.

In the high-performance, low-pay group, the median total return was 40 percent, or 33 percentage points above the comparable S&P 500 return. Yet median total pay was just $2.4 million, 60 percent below a competitive level. (For a listing of all the companies in the two groups, including performance and pay statistics, click here. Pay data for this study was supplied by Equilar Inc.)

While all of this has been going on, the corporate governance community has gone agog about sponsoring non-binding ``Say on Pay'' resolutions at various companies' annual shareholder meetings.

Insanity Defined

Why intelligent adults conclude that simply asking CEOs and corporate directors to change their ways will accomplish anything mystifies me. Even if a company loses one of these resolutions, it isn't required to do anything different.

But there is a way -- a simple way -- for Calpers to force change on the system: Sell the shares of that group of 18 companies and use the $1.3 billion in proceeds to buy shares of the second group.

One could argue that Calpers couldn't take that action before the performance statistics were generated and the pay figures published. But this study covered Calper's holdings as of May 8, when both the performance and pay results had been known for some time.

Moreover, consider that from Dec. 31 through the close on May 12, the median low-performing, high-pay company delivered an annualized total return of negative 0.47 percent, while the median high-performing, low-pay company's return was positive 17 percent. That reinforces the need to get moving. It's not as though the performance records for 2007 have been upset during the first 4 1/2 months of 2008. The dogs are still dogs, and the overperformers are still overperforming.

Send a Message

By shifting its portfolio this way, Calpers can send a message to the laggard companies a la California Governor Arnold Schwarzenegger: ``We'll be back.'' That is, if performance improves enough to justify a CEO's pay or pay is reduced to a level commensurate with performance.

That strategy would get a lot of attention. If all institutional investors moved similarly, the CEOs heading the poor performers would see their options go underwater and the value of their free shares fall even more than they already have.

At the same time, shares of the better-performing companies would rise faster. Thus, the actions by institutional investors would provide a big shove toward forging a closer relationship between pay and performance.

Last month, Dennis Johnson, Calpers's senior portfolio manager of corporate governance, was elected chairman of the Council of Institutional Investors, a Washington-based group of 130 pension funds that have total holdings of about $3 trillion.

So Johnson not only is in a position to clean out the stables in Calpers, but to influence 129 other institutional investors to do the right thing.

Message to Calpers: Cut the bloviating on corporate governance and start moving the junk out of your portfolio.

(Graef Crystal is a columnist for Bloomberg News. The opinions expressed are his own.

To contact the writer of this column: Graef Crystal in Santa Rosa, CA at graefc@bloomberg.net.

Last Updated: May 15, 2008 00:05 EDT