North Dakota investment board approves $1.3M in controversial bonuses despite opposition

The North Dakota State Investment Board on Friday approved the payout of $1.3 million in controversial bonuses for 12 Retirement and Investment Office staff -- though Gov. Kelly Armstrong said changes need to be made to the policy.

Only one board member, Adam Miller, voted against the bonuses. Armstrong said it was necessary to pay the bonuses to honor the state's commitment to the RIO staff.

"In North Dakota, when we make a deal, we honor it," the governor said. "The state of North Dakota made a deal with the SIB employees. We put this program in place. They have seen it. They know what it is. They have been relying on it for the last fiscal year. So that's what I hope we do today — we uphold our side of the deal for the employees hired and promised an incentive under this program."

SIB members and RIO staff have said the bonus program is designed to support recruitment and retention of employees. Approving the bonus payouts was originally on the agenda for the board's November meeting, but questions on the legality of the bonuses delayed the vote. Now, RIO staff and board members have said they have the legal authority to pay out the bonuses without legislative action.

"We have the legal authority to move forward. SIB's lawyer, assigned by the attorney general, says we can do this," Armstrong said during the meeting. "My lawyer in my office says we can do it. Legislative Council says we can do it. And in case anybody forgot, I'm a lawyer, too, and I say we can do it."

Two lawmakers, Sen. Sean Cleary, R-Bismarck, and Rep. Mitch Ostlie, R-Jamestown, have requested a formal attorney general's opinion on the board's authority to pay the bonuses without legislative action. The bonuses are not currently appropriated by a specific line item in the office's budget.

The two lawmakers have brought forward several concerns they have with the bonus structure in letters to the SIB and in interviews with the media.

Specifically, they have raised concerns that the RIO is basing its benchmark for paying out bonuses on the performance of external fund managers, despite a statutory requirement that the bonus payouts not occur unless the performance of internally managed investments exceeds policy benchmarks. The RIO has said the bonuses are based on the overall performance of the four largest client funds handled by the office, which had $191 million in excess returns — returns above the benchmark. Only 15% of the top four client funds are managed by the office's in-house program, though North Dakota Treasurer Thomas Beadle said the office is looking to grow the size of the in-house management program because it saves money that would otherwise go to external money managers.

RIO Executive Director Jodi Smith said in a memorandum in the board meeting materials that the "internally managed" statutory requirement is not a limitation on the scope of the incentive program, simply a condition for payout. She said under a broader interpretation, "internally managed" includes assets directly managed by external money managers because RIO staff picked which external money managers to use.

"RIO manages all assets under the board’s control, including assets implemented through external managers and those invested directly by staff," Smith said.

Board member Prodosh Simlai said he could take the board's word that it had legal standing to pay out the bonuses, and he could trust the board on who deserves bonuses, but he was not sure they were interpreting the definition of "internally managed" correctly.

"I'm still not sure how you can either limit or broaden the definition of internally managed investments," Simlai said. "In this scenario, our staff is doing a great job in selecting managers, but they're not really directly involved in the asset or the security selection ... Yes, we have paid fees to the external managers to generate returns, and we may pay bonuses to the staff, but we just need to be absolutely certain that the statute allows for this interpretation."

Cleary and Ostlie have also said the program includes more employees and larger amounts than they feel is reasonable. Multiple bonus payouts are over $100,000, and the highest bonus is roughly $300,000 for the office's chief financial officer, effectively doubling his salary. Some employees are eligible for bonuses despite not directly managing funds for the office's in-house program.

Smith said the RIO works like an engine where all parts and members of the office must work together to achieve its goals, appearing to explain the role other members of the RIO play in the in-house investment program's success that makes them eligible for bonuses.

"This is an engine, and all pistons have to fire, and if one of them stops, the engine stops. Doesn't matter if it's my investment team. Doesn't matter if it's my fiscal or my operations team, if any one of those stops moving, the whole system stops," she said.

"Those team members who are eligible for this bonus payment are all a part of the team, and we cannot function without any of them," she continued later in the meeting.

Both Cleary and Ostlie introduced a bill or amendment during the 2025 legislative session to curtail or eliminate the program. Neither of their attempts succeeded. However, Ostlie said he helped kill his own bill because he was told by the RIO that the bonus policy would be "fixed." He said the policy was not fixed after session.

Ostlie also recently brought up in his letter to the SIB that the benchmark used to determine whether bonus payouts were achieved was adopted in November, after the end of the 2025 fiscal year, making him question whether it is being applied retroactively and what internal money managers were told their benchmark was when they were hired. 

The Governor's Office said the benchmark used had been adopted in 2023 as the RIO's official benchmark for reporting and evaluation, and the incentive compensation plan was implemented with the expectation that the same benchmark would be used. Essentially, the November vote was a formality.

Armstrong took aim at the two legislators during Friday's meeting.

"Our RIO employees and our SIB members don't deserve to be inundated by individuals who introduced a bill last session and failed to build a coalition large enough to fill a phone booth," he said. "I will never cave to coordinated media campaign pressure in order to try and effectuate an outcome."

He also insinuated that the opposition to the bonuses was political — an insinuation that Cleary emphatically denied.

"The attorney general's opinion requests that I filed, and we still have to receive the answer to, were requested because of the ambiguity caused by the State Investment Board and by the Emergency Commission. This wasn't something I dreamed up one day," Cleary said. "I completely reject the characterization that this is politicizing it, or some sort of out-of-ordinary request when it's a request that was caused because of the actions of the State Investment Board and Emergency Commission, and I think we have responsibility to taxpayers to get this done the right way."

Despite his support for paying out the bonuses for the 2025 fiscal year, Armstrong said the bonus structure needs to change and that meetings are already being held to discuss how to change it.

Records obtained through an open records request show that State Investment Board members and Retirement and Investment Office staff have already held meetings to discuss potential changes to the policy, the Tribune confirmed.

Armstrong lauded the work of the RIO staff in managing the state's money, especially the Legacy Fund, which he emphasized is what allows the state to pay for things such as the $1,600 Primary Residence Tax Credit passed during the 2025 legislative session.

But he said the bonuses did not help recruit and retain staff. He said a better route is raising the base salary for RIO staff, which he said is something he would go to the Legislature and advocate for.

"I'm willing to stand on that," Armstrong said. "I'm going to go argue for reasonable compensation for the people that are managing $27 billion for the citizens in North Dakota. But I'm not willing to go to the Legislature and fall on that sword if we're handing out 100% bonuses, because I understand the political liability of it."

He still said there should be a bonus policy, but it should be tiered and it should include all RIO staff.

"I don't want haves and have-nots within our own organization," he said.

Smith said she would put together changes suggested by board members and present them to the SIB at its next meeting in March.